DLT‑driven interconnectedness: Bitcoin’s systemic role in Europe’s financial network

Abstract

This research aims to measure the systemic risk architecture of tokenized financial ecosystems, focusing on the impact of Distributed Ledger Technology (DLT) on European financial stability. As institutions increasingly adopt DLT and smart contracts, they form complex interconnections that allow disruptions, such as liquidity shocks, that cascade across the network. While DLT enables new horizons for the financial industry at the same time it introduces risk across different financial networks. This study evaluates the impact of Bitcoin as a primary digital asset on the systemic risk architecture of 29 major European financial institutions. Using a spillover connectedness analysis, the study identifies Bitcoin as a primary net transmitter of systemic risk in the system. Historical data between 2014 and 2024 reveals an upward trajectory in Bitcoin’s volatility spillovers, though this imbalance has recently stabilized toward more reciprocal dynamics. Findings highlight a significant risk asymmetry: Bitcoin injects volatility into the financial network while remaining largely insulated from equivalent systemic exposure. This disproportionate impact underscores Bitcoin’s role in driving systemic fragility, challenging its integration into institutional financial infrastructures.