Just the day before, there was quite a buzz in the crypto community over the Vanguard Group’s decision to change its long-standing stance. The firm announced it would allow ETFs and mutual funds to hold cryptocurrencies, which felt like a major win for the sector.
However, that optimism took a hit today with a new warning from the SEC.
The U.S. Securities and Exchange Commission (SEC) has sent out warning letters to several ETF providers, effectively halting applications for leveraged crypto ETFs that have more than 200% exposure to the underlying assets.
Nine ETF providers, including Direxion and ProShares, received these notices on December 2nd.
This warning comes at a time when activity is bustling in the cryptocurrency market.
On the same day, Vanguard Group, the second-largest asset manager globally, revealed that it would be trading ETFs and mutual funds primarily composed of cryptocurrencies on its brokerage platform.
Access to products related to Bitcoin, Ethereum, XRP, and Solana is now available for clients, signifying a big shift in Vanguard’s policy towards digital assets.
Research from SoSoValue noted a significant spike in demand within the two days following Vanguard’s announcement.
Meanwhile, institutional interest is growing in other areas as well. This week, Bank of America has advised its wealth management clients to consider allocating between 1% and 4% of their portfolios for digital assets—this is one of the strongest recommendations we’ve seen for this sector.
Starting January 5th, coverage will begin for four Bitcoin ETFs: Bitwise Bitcoin ETF, Fidelity Wise Origin Bitcoin Fund, Grayscale Bitcoin Mini Trust, and BlackRock’s iShares Bitcoin Trust.
The SEC has indicated that companies like Direxion and ProShares received notices regarding compliance requirements under the Investment Company Act of 1940.
The letter specified that funds looking for leverage must adhere to Rule 18f-4, which limits their value-at-risk to no more than 200% of a designated reference portfolio.
The regulator emphasized that funds tracking the inverse of an index—whether leveraged or not—should use that index for VaR calculations.
“We request that the registrant either modify its objectives and strategy to align with Rule 18f-4 or withdraw the application.”
Rule 18f-4 mandates that open-end funds maintain an unleveraged reference portfolio VaR under 200%.
ETFs listed from Direxion and ProShares that are up for revision include:
