A recent report by the Bank for International Settlements highlights the growing concern that cryptocurrency exchanges are morphing into entities that resemble banks, but without the necessary protections. These exchanges now offer services such as lending and yield products, which are similar to those offered by traditional financial institutions, but lack the same level of security.
The report notes that what appears to be a high-yield savings product is, in reality, an unsecured loan to a lightly regulated entity. The crypto industry's largest players have evolved beyond simple trading platforms, bundling services that are typically separated across banks, brokers, and exchanges.
The rapid growth of 'earn' and yield products is a major concern, as they are widely marketed to retail users as tools to generate passive income on their crypto assets. However, these products often promise attractive returns but are structured more like unsecured lending than savings. The report warns that these platforms are effectively taking deposits and recycling them into risky activities without the safeguards that make traditional banking stable. In many cases, users relinquish control and ownership of their digital assets to the platform, which then uses the funds for lending, trading, or market-making strategies.
The returns paid to customers are a share of the profits generated from these activities, but lack the insurance and transparency offered by traditional finance. The report cites the collapse of Celsius Network and FTX as examples of how users are exposed to the weaknesses in the industry. The BIS warns that users are exposed to the platform's solvency in the event of losses, and that the system is built on leverage, opacity, and deposit-like promises without protection.