Ethereum Risks Exposed: Bank of Italy’s Alarming Model Reveals Financial Stability Threats if ETH Value Collapses
ROME, Italy – In a groundbreaking analysis published this week, the Bank of Italy has modeled a severe stress scenario for the Ethereum blockchain, treating the world’s second-largest cryptocurrency network as critical financial infrastructure rather than merely a speculative asset. The central bank’s research paper, titled “What if Ether Goes to Zero? How Market Risk Becomes Infrastructure Risk in Crypto,” systematically examines how an extreme collapse in Ether’s (ETH) market value could cascade into operational failures, threatening the settlement layer for billions in stablecoins and tokenized assets. This study represents a significant shift in regulatory perspective, moving beyond consumer protection concerns to analyze systemic vulnerabilities within decentralized finance’s core architecture.
Ethereum Risks Modeled as Critical Infrastructure Failure
The Bank of Italy’s research, conducted by economist Claudia Biancotti, approaches Ethereum through the lens of financial stability rather than market speculation. Consequently, the paper establishes a crucial framework for understanding how blockchain networks transition from experimental platforms to essential settlement infrastructure. Biancotti’s model specifically examines the validator incentive structure that secures Ethereum’s proof-of-stake consensus mechanism, where validators stake ETH to participate in block validation and earn rewards denominated in the same token.
According to the model, a catastrophic decline in ETH’s price to near-zero levels would fundamentally break this economic security model. Validators, who incur operational costs in fiat currency, would find their staking rewards rendered worthless. The research predicts a rational economic response: a significant portion of validators would exit the network to cut losses. This mass exit would directly reduce the total amount of ETH staked, thereby diminishing the network’s cryptoeconomic security—a term central to the analysis.
The Validator Exodus Scenario
The paper details the technical consequences of reduced stake. First, block production would slow as the network struggles to maintain validator participation. Second, and more critically, Ethereum’s resistance to certain consensus attacks would weaken substantially. The cost to attack the network, measured by the amount of ETH needed to gain control, would plummet alongside the token’s value. Finally, the timely final settlement of transactions—a non-negotiable requirement for financial infrastructure—could become unreliable.
This chain of events illustrates the paper’s core thesis: market risk transforms into infrastructure risk. The study emphasizes that disruptions would extend far beyond cryptocurrency traders. Payment systems, decentralized applications (dApps), and the settlement of tokenized real-world assets (RWAs) that depend on Ethereum’s deterministic finality would all face uncertainty. The Bank of Italy thus frames ETH not as a standalone asset, but as a core operational input for a growing segment of the financial system.
Regulatory Implications and the Stablecoin Connection
The research arrives amid increasing regulatory scrutiny of blockchain’s role in mainstream finance. The European Union’s Markets in Crypto-Assets (MiCA) regulation, now fully implemented, establishes rules for stablecoin issuers, many of whom use Ethereum as their primary settlement layer. The Bank of Italy’s analysis directly questions the wisdom of building regulated financial services on infrastructure secured by a volatile native token.
The paper highlights the particular vulnerability of fiat-backed stablecoins like USDC and USDT, which represent the largest value settled on Ethereum. While these stablecoins maintain fiat reserves, their operational integrity—the ability to mint, burn, and transfer tokens—depends entirely on Ethereum’s uninterrupted function. A settlement delay or consensus failure during a period of ETH price stress could trigger a loss of confidence in the stablecoins themselves, potentially leading to redemption runs.
| Trigger | Direct Effect | Secondary Consequence | Systemic Risk |
|---|---|---|---|
| ETH Price → $0 | Validator rewards lose value | Validators exit the network | Reduced staked ETH, lower security |
| Lower Network Security | Slower block times, weaker attack resistance | Uncertain transaction finality | Settlement failures for dApps & stablecoins |
| Settlement Failure | Stablecoin transfers delayed | User panic, redemption requests spike | Pressure on stablecoin reserve assets, spillover to traditional finance |
Alignment with Broader European Warnings
The Bank of Italy’s findings echo concerns raised by other European institutions. Notably, the European Central Bank’s (ECB) November 2025 Financial Stability Review warned that large stablecoins could attain systemic importance. The ECB identified similar transmission channels: a shock could trigger runs, force rapid asset fire sales from reserve portfolios, and potentially cause deposit outflows from traditional banks if adoption broadens. The International Monetary Fund (IMF) has also published guidelines urging proactive management of stablecoin risks that extend beyond basic disclosure rules.
These coordinated warnings suggest a growing consensus among financial authorities: the interconnections between crypto-native systems and the traditional financial system are deepening. The Bank of Italy’s contribution is to pinpoint the specific technical mechanism—the validator incentive model—through which a market shock propagates into an infrastructure failure.
The Regulatory Dilemma: Mitigate or Prohibit?
The paper concludes by outlining a stark regulatory dilemma for supervisors. Financial institutions are increasingly exploring the use of public blockchains like Ethereum for efficiency gains in areas like cross-border payments and securities settlement. However, the inherent dependence of these chains on a volatile native token creates a fundamental conflict with financial regulators’ mandates for stability and reliability.
The Bank of Italy sketches two divergent policy pathways:
- Prohibition Path: Deem current public blockchains unsuitable for use in regulated financial infrastructure due to their native token dependency. This would push activity toward private, permissioned ledgers or traditional systems.
- Mitigation Path: Permit the use of public chains but impose stringent risk-mitigation requirements on supervised entities. These could include:
- Comprehensive business-continuity and disaster-recovery plans.
- Arrangements for contingency chains or fallback settlement systems.
- Minimum standards for the “economic security” of the underlying blockchain, potentially measured by the total value staked in fiat terms.
- Stress testing for extreme token price scenarios.
The research does not endorse one path over the other but clearly presents the trade-off. The mitigation approach fosters innovation but requires supervisors to develop entirely new oversight competencies for cryptoeconomic systems. The prohibition approach is simpler but may stifle efficiency gains and push activity into less transparent jurisdictions.
Conclusion
The Bank of Italy’s modeling of Ethereum risks represents a sophisticated escalation in central bank analysis of cryptocurrency networks. By framing ETH not as an investment but as a critical operational input, the study illuminates a previously underappreciated vulnerability at the heart of decentralized finance. The potential for market risk to morph into infrastructure risk presents a clear challenge for regulators worldwide, particularly as tokenization of real-world assets accelerates. The paper’s ultimate message is that the stability of financial services built on Ethereum is inextricably—and perhaps problematically—linked to the market valuation of its native token, demanding a proactive and nuanced regulatory response to ensure overall financial stability.
FAQs
Q1: What is the main finding of the Bank of Italy’s research on Ethereum?
The main finding is that a collapse in Ether’s (ETH) market value could severely damage the Ethereum blockchain’s operational integrity. This happens because validators, who secure the network for ETH rewards, would exit if those rewards became worthless, reducing network security and potentially causing settlement failures for stablecoins and other financial applications.
Q2: Why does the Bank of Italy treat Ethereum as “critical financial infrastructure”?
The bank notes that Ethereum is no longer just for speculation. It is increasingly used as a settlement layer for substantial value, including major fiat-backed stablecoins (USDC, USDT) and tokenized real-world assets. This functional role in the movement and finality of financial transactions justifies viewing it through an infrastructure lens.
Q3: How does this research relate to stablecoin regulations like MiCA?
MiCA regulates stablecoin issuers but doesn’t fully address the risks of the underlying blockchain they use. This paper highlights a gap: even a perfectly regulated, fully-reserved stablecoin can fail operationally if the blockchain it runs on (like Ethereum) fails due to a collapse in its native token’s value.
Q4: What are the two regulatory options presented by the study?
The study outlines a choice for regulators: either 1) prohibit supervised financial institutions from relying on public blockchains due to their native token risk, or 2) allow their use but mandate strict risk-mitigation measures like contingency plans and minimum economic security standards for the network.
Q5: Has any other institution raised similar concerns?
Yes. The European Central Bank (ECB) and the International Monetary Fund (IMF) have both warned about the financial stability risks posed by systemically important stablecoins. The Bank of Italy’s research adds a crucial technical layer by explaining exactly how a crypto market shock could translate into a broader infrastructure failure.
