The Bank for International Settlements has issued a warning that cryptocurrency exchanges are increasingly providing banking services, such as lending and yield products, but without the same level of protection as traditional financial institutions. According to the report, these services are often marketed as high-yield savings products but are actually unsecured loans to lightly regulated 'shadow banks'.
The report highlights the rapid growth of 'earn' and yield products, which are widely 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 savings and lack the safeguards that make traditional banking stable.
The report notes that users of these platforms often relinquish control and ownership of their digital assets, which are then used for lending, trading, or market-making strategies. The returns paid to customers are a share of the profits generated from these activities, but the arrangements lack the insurance and transparency offered by traditional finance. The report cites the collapse of Celsius Network and FTX as examples of the risks posed to users by these unregulated 'shadow banks'.
The BIS warns that users are exposed to the platform's solvency in the event of losses and that the lack of transparency and regulation in the industry poses significant risks to the stability of the financial system.