Crypto-Linked Systemic Risk Now on the Horizon
The Financial Stability Board (FSB) has issued a fresh warning about the growing integration between the crypto sector and traditional finance (TradFi), signaling that crypto markets may soon cross a “tipping point” in terms of systemic risk.
“We may be approaching a tipping point here,” said outgoing FSB Chair Klaas Knot in a recent speech delivered in Madrid. While crypto does not currently pose a systemic risk, he cautioned that the situation is rapidly evolving.
ETFs and Stablecoins Deepen TradFi-Crypto Interlinkages
Knot emphasized the impact of crypto ETFs, which allow retail investors to gain digital asset exposure without handling wallets or private keys. This accessibility has significantly lowered entry barriers, bringing a wider pool of investors into crypto markets.
He also flagged stablecoins as a key concern, noting that stablecoin issuers hold large amounts of U.S. Treasurys. This creates a direct connection between crypto and traditional bond markets, increasing the potential for spillover risk.
“That’s a segment that we clearly must monitor closely,” he added.
Stablecoins Already Affect Treasury Yields
According to recent financial research, stablecoin inflows have a measurable impact on short-term Treasury yields. The study found that:
- Inflow of stablecoins lowers 3-month yields by 2–2.5 basis points within 10 days.
- Outflows raise yields by 6–8 basis points, particularly affecting short-term maturities.
- USDT and USDC are the most influential issuers in this regard.
This shows that stablecoins are already embedded in global financial systems, with potential implications for liquidity and monetary policy.
GENIUS Act Could Accelerate Stablecoin Growth
The warning comes just as the US Senate advances the GENIUS Act, a proposed federal bill that would establish a national regulatory framework for stablecoins. If passed, it could further accelerate the mainstream adoption of dollar-pegged digital assets, strengthening the U.S. position in global digital finance.
Conclusion: A Delicate Balance Ahead
As crypto and TradFi continue to merge, regulators face a pivotal moment. While innovation brings opportunity, the FSB’s warning highlights the urgent need for global coordination and regulatory clarity to prevent financial instability.