The Bank for International Settlements has issued a warning that cryptocurrency exchanges are increasingly providing services similar to those of traditional banks, such as lending and yield products, but without the necessary protections. According to the report, these exchanges have evolved into complex financial institutions, offering a range of services that are typically provided by separate entities in the traditional financial sector. The report highlights the rapid growth of 'earn' and yield products, which are often marketed to individual investors as a means of generating passive income from their cryptocurrency holdings.
However, these products are often structured more like unsecured loans than traditional savings products, and they lack the safeguards and insurance that are typically associated with traditional banking. The report notes that users of these platforms often relinquish control of their assets, which are then used for various purposes such as lending, trading, and market-making.
The returns paid to customers are a share of the profits generated from these activities, but users are exposed to the risk of losses if the platform becomes insolvent. The report cites the collapse of Celsius Network and FTX as examples of the risks associated with these types of arrangements, highlighting the need for greater transparency and regulation in the industry.