Why Were the Filings Halted?

The SEC highlighted that leverage above 2x could trigger frequent fund terminations and create significant market volatility. Balchunas added, “The analyst also stated that allowing leverage above 2x could result in frequent termination events and a highly unstable market scenario.” Rule 18f-4 caps the value-at-risk at 200% and requires derivative-based funds to continuously monitor their exposure.

Direxion’s leveraged crypto ETFs and high-beta equity products were specifically affected by this notice. The SEC also issued a warning covering single-stock and sector-based leveraged ETF filings. “This step is a critical measure to prevent unnecessary risk in the market,” experts commented.

Rising Applications and Investor Concerns

In October, SEC’s Investment Management Division director Brian Daly noted a sharp increase in filings for 3x and 5x leveraged ETFs. Daly said, “The agency has received a large number of registration statements for ETFs seeking to offer 3x and 5x leveraged, equity-linked exposure. It is still unclear whether such ETFs would be consistent with the Derivatives Rule, Rule 18f-4, which generally limits leverage to 2x.”

VolShares offered 5x leveraged products for SOL, Ethereum, and XRP, while GraniteShares submitted a 3x XRP ETF filing. Morningstar ETF researcher Bryan Armour noted, “More than half of leveraged ETFs launched over the past three years have closed,” highlighting the inherent risks. However, Armour also said the SEC has been relatively open to innovation and new strategies.

Key Takeaways

• Filings for 3x and 5x leveraged crypto ETFs have been halted.

• Rule 18f-4 limits value-at-risk to 200%.

• SEC instructed issuers to revise strategies or withdraw filings.

• Direxion, VolShares, and GraniteShares’ applications were affected.

• Leverage above 2x could increase fund terminations and market volatility.

SEC’s decision to halt 3x and 5x leveraged crypto ETF filings serves as a critical warning for investors. Analysts emphasize that products with leverage above 2x may face heightened market fluctuations and sudden fund liquidations. This development urges both institutional and retail investors to reassess risk management strategies. Additionally, regulations under Rule 18f-4 make long-term sustainability for high-leverage ETFs challenging. Investors should consider these new market dynamics and regulatory limits when planning their strategies.

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Ethena Labs has proposed a plan to preserve USDe’s peg stability by repurchasing and burning approximately $95 million worth of USDe — equal to about 1.2% of its current collateral assets — whenever the secondary market price falls to $0.99 or below.

Will This Move Work?

According to the statement from Ethena Labs, the event was not a global de-peg but rather an issue isolated to Binance, caused by liquidity and oracle discrepancies. When examining other platforms during the same period, USDe maintained its stability with almost no price change.

If the strategy proposed by Ethena Labs is implemented, the repurchased USDe will be burned, meaning they will be permanently removed from circulation. This will reduce the circulating supply and create a stronger support level for maintaining price stability.

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Will the Proposal Be Approved?

The Ethena Risk Committee will evaluate this strategy under its governance framework and submit it to a management vote. If approved, buybacks will be carried out through a bidding process between Ethena and centralized exchanges. After bids are accepted, settlements will take place off-exchange, minimizing deposit collateral risks for exchanges.

How Will $USDe Be Affected?

A buyback of this scale would create strong price support for USDe, helping prevent potential de-peg events. As approximately 1.2% of the circulating supply gets removed, the overall collateral ratio of USDe would improve.

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