The SEC told Valkyrie to withdraw its leveraged bitcoin ETF application - a sign it won't tolerate that much risk for crypto investors

• The SEC has asked Valkyrie to withdraw its leveraged bitcoin ETF application, WSJ reported.
• It wants to limit crypto investor exposure to unleveraged funds like the ProShares ETF that launched last week.
• Chair Gary Gensler has said complex, leveraged ETFs can pose risks even to sophisticated investors.

The Securities and Exchange Commission doesn't want to approve leveraged bitcoin exchange-traded funds, the Wall Street Journal reported Wednesday, citing a person familiar with the matter.

Going by an SEC request to at least one asset manager, it looks like the agency wants to restrict crypto investors to products providing unleveraged exposure, such as the ProShares Bitcoin Strategy ETF, according to the report.

ProShares is the first-ever US bitcoin-linked ETF that began trading last week. It doesn't directly invest in or hold bitcoin, but invests in bitcoin futures contracts.

After launching its own futures-based bitcoin ETF last Friday, Valkyrie Investments is waiting for an answer on its leveraged funds product. The asset manager on Tuesday filed for a leveraged bitcoin futures ETF offering 1.25x exposure to the bitcoin reference rate. This means the fund seeks to boost daily returns of a portfolio of bitcoin derivatives for US investors by using 1.25 times leverage, or borrowed money.

But Valkyrie was asked to withdraw its application, the Journal reported, citing a source. As of Thursday, the filing still remained effective.

This move highlights yet another regulatory opposition to innovative products that asset managers in the nascent crypto asset management industry face. Since the Winklevoss twins first filed an application to launch a bitcoin-related ETF in 2013, it's taken nearly a decade for the SEC to greenlight a product like this.

The Wall Street watchdog has been hesitant to allow offerings that it believes might be vulnerable to fraud, manipulation, and other such risks, the Journal said.

Chairman Gary Gensler said earlier this month that complex, leveraged ETFs "can pose risks even to sophisticated investors, and can potentially create system-wide risks by operating in unanticipated ways when markets experience volatility or stress conditions."

Separately on Tuesday, ETF issuer Direxion said in a filing that it wants to short the price of a bitcoin futures contract. The Direxion Bitcoin Strategy Bear ETF would effectively allow investors to bet against the bitcoin futures contract used by the ProShares ETF.

Under rules that govern ETF proposals, the agency has 75 days to respond to offering papers before they would automatically come into effect.

As a courtesy, the SEC can request fund managers pull their filings in some cases. But issuers have the choice of whether they want to or not, in case they want to force the regulator to reach a decision.

The SEC declined to comment on the WSJ report.

Read More: The head of 'megatrends' at $3 trillion iShares shares the 4 areas of the market he thinks are best positioned to rake in big returns in the years ahead as the worst of COVID recedes