Too Big to Fail

The concept of too big to fail applies to entities whose size, interconnectedness, or importance is such that their collapse would cause catastrophic damage to the entire financial system. In the crypto world, this could apply to major centralized exchanges, stablecoin issuers, or foundational lending protocols.

Because their failure would be so destructive, these entities are often subject to much higher regulatory scrutiny and stricter capital requirements. This status creates a moral hazard, as these firms might take excessive risks, expecting a bailout or systemic support.

Regulators strive to ensure that no single entity holds this level of systemic power. It is a central theme in financial stability policy.