The Bank for International Settlements has issued a warning that cryptocurrency exchanges are increasingly providing services similar to traditional banks, including lending and yield products, but without the same level of protection. According to the report, these services are essentially unsecured loans to under-regulated entities. The crypto industry's major players have transformed into multifaceted intermediaries, offering a range of services that typically would be separated among banks, brokers, and exchanges.
The report highlights the rapid growth of 'earn' and yield products, which are often marketed to retail users as a means to generate passive income from their crypto assets, but actually resemble unsecured lending rather than savings. These platforms take deposits and invest them in high-risk activities without the stability and safeguards of traditional banking. Users often relinquish control and ownership of their assets to the platform, which uses the funds for various strategies, with customers receiving a share of the profits.
However, these arrangements lack the insurance and transparency of traditional finance, leaving users exposed to the platform's solvency in the event of losses. The report cites the collapse of Celsius Network and FTX as examples of the weaknesses in the industry, highlighting the risks of a system built on leverage and opacity without adequate protection.