Key Insights
- •The U.S. Securities and Exchange Commission (SEC) has reportedly implemented a significant change to crypto rules, targeting heavily-leveraged ETF providers.
- •This regulatory action could effectively halt the offering of ETFs with 3X or higher leverage.
- •The move follows a period of extreme market volatility and liquidations, influenced by high leverage.
- •The SEC's decision aims to curb price manipulation and protect investors by capping leverage at 2X for crypto ETFs.
SEC Implements Leverage Cap on Crypto ETFs
The U.S. Securities and Exchange Commission (SEC) has reportedly made a critical change to crypto rules, according to recent news updates. The regulatory watchdog is cracking down on leverage, in a move that may counter heavy volatility and price manipulation in the crypto market. According to the latest crypto news, the SEC recently served ETF providers with warning letters over the issuance of extreme leverage. In other words, crypto ETFs will no longer be allowed to offer more than 200% or 2X leverage.
The official statement over the decision revealed that the SEC responded with the crypto rules change due to the rising number of applications for highly leveraged crypto ETFs.
Market Impact of High Leverage and the SEC's Response
The SEC’s decision to cap leverage is expected to have a significant impact on the market and could be viewed as a positive development, depending on one's perspective. To fully understand why, it is important to examine how a high appetite for leverage impacted the market in 2025.
Bitcoin open interest across exchanges surged over $94 billion in October. This represented the highest open interest recorded in the cryptocurrency’s entire history. The record-high open interest levels were characterized by a heavy appetite for leverage. As a result, the crypto market went through one of its most volatile periods in recent history.
Extremely high levels of open interest were also observed in top cryptocurrencies. More importantly, these figures highlighted a robust demand for crypto derivatives, signifying the level of leverage across the market. The extreme leverage levels set the markets up for severe liquidation, which consequently led to massive volatility. The crypto market alone experienced about $19 billion worth of liquidations on October 10. This was the highest daily liquidation figure recorded in history.
The extreme levels of open interest and massive liquidations provided a glimpse into just how dangerous leverage can be, considering the heavy losses incurred. This might be the reason why the SEC opted to cap leverage use among ETFs.
Analyzing the Implications of the Leverage Cap
While the SEC’s cap on leverage affects ETFs broadly, it will likely impact crypto ETFs the most. One of the main reasons for this is that retail investors have been using leverage to execute highly leveraged trades, which elevated the risk of losses. The SEC may thus be aiming to introduce the cap as an investor-protection measure.
On the flip side, this move may also lead to lower inflows for crypto ETFs, especially on the derivatives side, but it may make spot ETFs more appealing. The move may also lead to lower volatility in the crypto market. While some may see this as a net positive for risk management, it undercuts volatility where swing traders thrive. The depth of the SEC’s cap on leverage may thus depend on trading strategy.
Nevertheless, the move demonstrates the SEC’s growing involvement and efforts towards bringing some order to the chaos that is the market. The big question now is whether the SEC’s efforts will help steer liquidity towards the spot market. Bullish expectations previously encouraged a preference for derivatives.