The Bank for International Settlements has issued a warning that cryptocurrency exchanges are increasingly providing services similar to those of traditional banks, including lending and yield products, but without the necessary protections. According to the report, these services are essentially unsecured loans to under-regulated entities. The crypto industry's major players have evolved into multifaceted intermediaries, offering a range of services that would typically be provided by separate entities such as banks, brokers, and exchanges. The report highlights 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 often resemble unsecured lending rather than savings, and their structure poses significant risks. Users of crypto exchanges often relinquish control of their assets to the platform, which then utilizes the funds for various activities such as lending, trading, and 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 provided by traditional finance.
The report cites the collapse of Celsius Network and FTX as examples of the risks faced by users, highlighting the weaknesses that still pervade the industry. The BIS warns that users are exposed to the solvency of the platform in the event of losses, and that the system is built on leverage, opacity, and deposit-like promises without protection.