The Bank for International Settlements has issued a warning that cryptocurrency exchanges are increasingly providing services akin to traditional banking, such as lending and yield products, but without the corresponding protections. This development has led to the rise of 'shadow banks' within the crypto industry, where users are exposed to significant risks due to the lack of insurance and regulatory oversight.
The report highlights the rapid growth of 'earn' and yield products, which are often marketed as a means to generate passive income but are, in reality, unsecured loans to lightly regulated entities. The biggest players in the crypto industry have evolved into multifaceted intermediaries, offering a range of services that blur the lines between banking, brokerage, and exchange activities. The authors of the report express concern over the fact that these platforms take deposits and engage in risky activities without the stability-enhancing safeguards found in traditional banking. Users of these platforms often relinquish control and ownership of their digital assets, which are then used for lending, trading, or market-making strategies, with the returns paid to customers being a share of the profits generated from these activities.
However, these arrangements lack the transparency and insurance provided by traditional finance, leaving users exposed to the platform's solvency in the event of losses. The report cites the collapse of Celsius Network and FTX as examples of the weaknesses prevalent in the industry, where poor management, leverage, opacity, and unsecured promises led to significant losses for users.
The BIS also references the flash crash of October 2025, which resulted in an estimated $19 billion in forced liquidations across crypto derivatives markets, as a demonstration of how quickly these dynamics can spiral out of control.