Ripple has expanded into nearly every corner of the crypto industry, from stablecoins to asset custody. Now it is edging into Wall Street's terrain.

The crypto firm has emerged as a serious player in providing swap financing to leveraged exchange-traded funds, or those that let investors amplify their bets on a specific stock or index.

Swap financing might not captivate the public quite like a multibillion-dollar deal or an initial public offering, but it is one of those lucrative businesses that reliably churn out fees for banks and securities firms, quarter after quarter. And Ripple wants in.

The firms that manage leveraged ETFs use total return swaps and other derivatives to produce the desired return (say, twice the daily move of Nvidia shares). A bank or broker steps in to sell them that contract in exchange for a fee, and then hedges its exposure by buying stocks or derivatives.

Leveraged ETFs have exploded in popularity in recent years. According to Morningstar Direct data, there are 593 leveraged ETFs in the U.S., managing more than $256 billion in assets. Of these, 426 are single-stock leveraged funds, a category first greenlighted by regulators in 2022.

Ripple got into swap financing last year through its $1.25 billion acquisition of Hidden Road, a prime brokerage that caters to crypto hedge funds. The business, now called Ripple Prime, is working with a number of ETF providers and wants to expand to other investment managers, including hedge funds. On Tuesday, Ripple Prime announced it will provide prime brokerage, clearing and financing services to hedge fund Brevan Howard.

"It's definitely a growing and meaningful part of our business, so we are excited about it in that sense," said Noel Kimmel, president of Ripple Prime who previously worked at Cerberus Capital Management and other traditional Wall Street firms.

Ripple and other nonbank firms like Jane Street and Clear Street are making headway in the growing market for leveraged ETFs in part because banks still face stricter rules on how much risk they can take. And many of the investment firms launching new leveraged ETFs are startups themselves and lack longstanding relationships with banks.

And the fees are really good.

"They see the growth of this space and the usage rate of it climbing, and I think that's why more parties are getting involved," said Todd Sohn, chief ETF strategist at Baird Strategas. "And they know they can offer higher swap fees for themselves."

Swap fees on ETFs vary based on benchmark interest rates, agreement terms and total target exposure. If the underlying security is volatile or hard to trade, the fund may pay a wider spread to the banks or broker dealers.

In one example, the Tradr 2X Long SNDK Daily ETF pays a fee based on the overnight bank funding rate plus 4 percentage points to Ripple, according to a regulatory filing. As of Tuesday, the fee would pay out roughly 8% of the fund's assets on an annualized basis.

That is coming directly from the ETF's investors. Swap financing costs are included into a leveraged fund's net asset value over time and are separate from the fund's management fee. Leveraged ETFs typically carry a management fee of around 1%.

When held for longer than a single trading session, the combination of swap costs, daily compounding and volatility can drag down investor returns. For example, the Defiance Daily Target 2x Long MSTR ETF fell 53% year-to-date, dramatically underperforming its underlying stock, which gained 0.9% over the same period.

"It's like a termite almost, just kind of chips away every day," Sohn said.

The swap-financing firms also face significant risks. Any extreme single-day moves in an underlying stock could wipe out a leveraged fund's equity, leaving the counterparty exposed to losses. To hedge their exposure, swap providers often put on trades with a different set of asset managers or market makers.

"The worst case outcome is a single-day massive decline greater than 50%, which would wipe out the ETF entirely," said Dan Aronson, head of specialist consulting group at Janus Henderson, which offers hedging strategies to banks. "It's also why banks are looking at hedging that outcome."