Systemic Risks in Crypto Lending and Margin Trading: Navigating Institutional Accountability and Regulatory Preparedness

The integration of cryptocurrency into the global financial system has reached a critical inflection point. By Q3 2025, legislative milestones like the GENIUS Act and CLARITY Act have provided a clearer regulatory framework for stablecoins and digital commodities, accelerating institutional adoption, a Q3 2025 recap found. However, this rapid evolution has also exposed systemic vulnerabilities in crypto lending and margin trading, particularly as leverage expands and interconnectedness with traditional finance deepens.

The Legacy of Collapse: Lessons from FTX and Celsius

The 2022–2023 collapses of Celsius and FTX remain cautionary tales of governance failures and regulatory gaps. FTX's $8 billion liquidity shortfall triggered a domino effect, bankrupting firms with exposure to its ecosystem, according to a ScienceDirect study. These events underscored that systemic risks often stem from operational mismanagement-such as opaque reserve practices and rehypothecation-rather than inherent flaws in crypto technology itself, as Galaxy research notes. For instance, the FTX crisis was attributed to a lack of corporate oversight and inadequate audits, not the structural design of blockchain-based lending, a CMLJ article argued.

Despite these lessons, new risks are emerging. By Q1 2025, crypto-collateralized lending saw a decline in open borrows, but leverage shifted to unconventional channels. Publicly traded companies like MicroStrategy added $2.1 billion in debt to purchase Bitcoin, while futures markets like Hyperliquid experienced a 175.33% surge in open interest, according to the Galaxy report. This shift highlights a growing reliance on institutional leverage, which, if mismanaged, could amplify contagion risks.

Image: A timeline illustrating key regulatory milestones (e.g., GENIUS Act, MiCAR) alongside major crypto failures (e.g., FTX, Celsius) to visualize the interplay between systemic risks and institutional responses.

Regulatory Evolution: From Enforcement to Frameworks

Post-2023, regulatory bodies have prioritized accountability and transparency. The U.S. Securities and Exchange Commission (SEC) intensified enforcement actions, securing $2.6 billion in investor restitution in 2024 alone, CoinLaw statistics show (CoinLaw statistics). Notably, the Terraform Labs case-resulting in a $4.68 billion fine-set a precedent for holding entities accountable for unregistered securities activities, according to a SocialCapitalMarkets report. Meanwhile, the SEC's 2025 strategy shifted focus to fraud prevention, signaling a more targeted approach, as described in an ORIAN update.

Legislative efforts have also advanced. The GENIUS Act, enacted in July 2025, established reserve requirements and AML mandates for stablecoin issuers, summarized in a KPMG brief. Complementing this, the CLARITY Act aims to clarify jurisdictional boundaries between the SEC and CFTC, reducing regulatory arbitrage, as noted in the KPMG brief. Globally, the European Union's Markets in Crypto-Assets Regulation (MiCAR) introduced prudential requirements for stablecoins, including liquidity and reserve mandates, explained in an OKX guide.

Chart: A bar graph comparing SEC enforcement actions (2023–2025) and corresponding restitution amounts, highlighting the Terraform Labs case as the largest penalty.

The New Frontier: Digital Asset Treasury Companies (DATs)

A recent innovation in crypto leverage is the rise of DATs, which purchase Bitcoin and Ethereum using borrowed capital. While these entities have injected liquidity into the market, their business models remain untested. For example, equity-market weakness in late 2025 raised questions about DATs' ability to service debt amid tightening liquidity conditions, according to a CoinDesk report. The European Central Bank (ECB) has warned that stablecoins and DATs could undermine monetary policy by facilitating capital flows outside traditional systems, in a BitPylon article.

Moreover, the Financial Accounting Standards Board (FASB) reclassified crypto assets as intangible assets under ASU 2023-08, requiring periodic fair value measurements, as reported by the CPA Journal. This change aims to align accounting practices with the volatile nature of crypto, but it also introduces new complexities for institutional investors.

Global Coordination and the Path Forward

Systemic risks in crypto lending and margin trading demand coordinated global action. The Financial Stability Board is finalizing an FSB framework based on the principle of "same activity, same risk, same regulation," aiming to harmonize standards across jurisdictions. Meanwhile, the Basel Committee has assigned risk weights to crypto assets, emphasizing tailored liquidity requirements, as outlined in the OKX guide.

However, challenges persist. The ECB's Financial Stability Review highlighted liquidity mismatches and leverage in the crypto sector, urging stricter oversight of rehypothecation and collateral practices, according to an ECB review. As institutions continue to dominate Bitcoin holdings-reducing retail-driven volatility-the sector's stability will depend on robust regulatory guardrails, as the Q3 2025 recap emphasized.

Conclusion: Balancing Innovation and Accountability

The crypto ecosystem's integration into traditional finance has unlocked new opportunities but also amplified systemic risks. While regulatory frameworks like the GENIUS Act and MiCAR represent progress, enforcement actions and accounting reforms must keep pace with innovation. For investors, the key takeaway is clear: institutional accountability and regulatory preparedness are not just compliance hurdles but foundational pillars for sustainable growth.