The Bank for International Settlements has released a report indicating that cryptocurrency exchanges are increasingly providing services traditionally offered by banks, such as lending and yield products, but without the same level of protection. According to the report, what appears to be a high-yield savings product is actually an unsecured loan to a lightly regulated entity.
The report highlights the evolution of the crypto industry's largest players into multifaceted intermediaries, offering a range of services that would typically be separated among banks, brokers, and exchanges. The primary concern is the rapid growth of 'earn' and yield products, which are widely marketed to individual users as a means of generating passive income from their crypto assets.
However, these products are structured more like unsecured lending than savings and lack the safeguards that make traditional banking stable. Users of these platforms often relinquish control and sometimes ownership of their assets, which are then used for various activities such as lending, trading, or market-making strategies. The returns paid to customers are a share of the profits generated from these activities, but these arrangements lack the insurance and transparency offered by traditional finance.
The report warns that users are exposed to the platform's solvency in the event of losses, citing the collapse of Celsius Network and FTX as examples of the weaknesses in the industry. The report concludes that the system is built on leverage, opacity, and deposit-like promises without protection, highlighting the need for greater safeguards in the cryptocurrency industry.