A report released by the Bank for International Settlements has highlighted the growing trend of cryptocurrency exchanges offering services akin to traditional banking, such as lending and yield products, but without the same level of protection for users. The report notes that these services, which appear to be high-yield savings products, are in reality unsecured loans to lightly regulated entities.
The crypto industry's largest players have evolved into multifaceted intermediaries, combining services that are typically separated across banks, brokers, and exchanges. The rapid growth of 'earn' and yield products, which are widely marketed to retail users as a means to generate passive income, is a significant concern. These products often promise attractive returns but are structured more like unsecured lending than savings.
As a result, platforms are essentially taking deposits and using them for risky activities without the necessary safeguards, leaving users exposed to potential losses. In many cases, users relinquish control and ownership of their digital assets to the platform, which then uses the funds for various strategies, with returns paid to customers being a share of the generated profits. However, these arrangements lack the insurance and transparency offered by traditional finance, leaving users vulnerable.
The report cites the collapse of Celsius Network and FTX as examples of the risks posed by these weaknesses in the industry, emphasizing that the unraveling of these platforms was not just a result of poor management but a system built on leverage, opacity, and unprotected deposit-like promises.