The Bank for International Settlements has expressed concerns that cryptocurrency exchanges are increasingly offering services similar to those of traditional banks, including lending and yield products, but without the same level of protection for users. According to a report released by the BIS, these exchanges are essentially operating as 'shadow banks,' providing unsecured loans to users while promising high-yield savings products. The report highlights the rapid growth of 'earn' and yield products, which are often marketed to retail users as a means of generating passive income from their crypto assets. However, these products are structured more like unsecured lending than traditional savings, and users are exposed to significant risks.
The BIS warns that these platforms are taking deposits and using them for risky activities without the necessary safeguards, leaving users vulnerable to losses. The report cites the collapse of Celsius Network and FTX as examples of the risks posed by these unregulated activities.
The BIS also notes that users often relinquish control and ownership of their digital assets to these platforms, which can use the funds for lending, trading, or market-making strategies, with the returns paid to customers being a share of the profits generated from these activities. The lack of transparency and insurance in these arrangements leaves users exposed to the platform's solvency in the event of losses.
The report concludes that the weaknesses in the crypto industry, including leverage, opacity, and deposit-like promises without protection, pose significant risks to users and the broader financial system.