A move to allow certain European institutional investment funds to invest more heavily in crypto could increase systemic risk, suggests Fitch Ratings.

Last week, new rules took effect that allow certain investment funds in Germany — so-called Spezialfonds, which are primarily used by insurance and pension fund managers — to invest up to 20% of their assets in crypto.

“The changes bring cryptocurrencies into the traditional, and more regulated, financial system and could result in increased, albeit intermediated, exposure to crypto-assets for retail investors whose assets, retirement benefits or insurance policies are managed by such institutions,” said Fitch in a new report.

With approximately €1.8 trillion in assets under management in these funds, Fitch reported that this implies that up to €360 billion could theoretically be directed into crypto — noting that Bitcoin’s current market cap is about €730 billion.

The report said that, while the demand for crypto could rise as a result of the new limits, Fitch doesn’t expect crypto allocations to approach the 20% threshold in the short term, given the added risks posed by the asset class, including heightened volatility and liquidity risk.

“We believe that managing the liquidity risk of mutual funds invested in such highly volatile assets would be an important consideration for fund managers,” the report said.

For now, Fitch said it does not expect significant crypto exposures in regulated funds. However, “if other regulators follow Germany’s lead in allowing institutional — and potentially direct retail — access to cryptocurrency funds, AUM could eventually reach levels sufficient to pose greater financial stability risks.”

For instance, Fitch suggested that if AUM in funds with significant crypto exposure rose well above €100 billion, the risk of contagion to the broader financial system — if a crypto-exposed fund failed, or had to suspend redemptions — would be more substantial.

“Banks or other lenders might also be affected if those affected funds used these institutions for leverage or liquidity facilities,” it said.