The Bank for International Settlements has issued a warning that cryptocurrency exchanges are increasingly offering services akin to traditional banking, including lending and yield products, but without the corresponding protections. According to the report, these services, including 'earn' products, are essentially unsecured loans to lightly regulated entities. The crypto industry's major players have transformed into multifaceted intermediaries, combining services that are typically separated across different financial institutions.
The report highlights the rapid growth of 'earn' and yield products, which are extensively marketed to individual users as a means to generate passive income from their crypto assets, often with attractive returns but structured more like unsecured lending than savings. These platforms function by taking deposits and reinvesting them into high-risk activities, lacking the stability and safeguards of traditional banking. Users often relinquish control and ownership of their assets to the platform, which utilizes these funds for various strategies, with customers receiving a share of the profits.
However, these arrangements lack the insurance and transparency of traditional finance, leaving users exposed to the platform's financial health. The report cites the collapse of Celsius Network and FTX as examples of the weaknesses in the industry, emphasizing that the failures were not just due to poor management but a result of a system built on leverage and opacity without adequate protection. The report also references the 2025 flash crash, which led to significant forced liquidations across crypto derivatives markets, highlighting the rapid escalation of these dynamics.