Impaired DNA crosslink repair leads to Fanconi anemia (FA), characterized by a unique manifestation of bone marrow failure and pancytopenia among diseases caused by DNA damage response defects. As a germline disorder, why the hematopoietic hierarchy is specifically affected is not fully understood. We find that reprogramming transcription during hematopoietic differentiation results in an overload of genotoxic stress, which causes aborted differentiation and depletion of FA mutant progenitor cells. DNA damage onset most likely arises from formaldehyde, an obligate by-product of oxidative protein demethylation during transcription regulation. Our results demonstrate that rapid and extensive transcription reprogramming associated with hematopoietic differentiation poses a major threat to genome stability and cell viability in the absence of the FA pathway. The connection between differentiation and DNA damage accumulation reveals a novel mechanism of genome scarring and is critical to exploring therapies to counteract the aplastic anemia for the treatment of FA patients.