The Bank for International Settlements has issued a report highlighting the risks associated with cryptocurrency exchanges that offer banking services, such as lending and yield products, without providing the same level of protection as traditional financial institutions. According to the report, these services, which are often marketed as high-yield savings products, are in reality unsecured loans to lightly regulated entities. The report notes that the largest players in the crypto industry have evolved into multifunctional intermediaries, offering a range of services that would typically be separated across different financial institutions.
The rapid growth of 'earn' and yield products is a major concern, as these products are widely marketed to retail users as a way to generate passive income on their crypto assets, but their structure is more akin to unsecured lending than traditional savings. The report warns that these platforms are effectively taking deposits and using them for risky activities without the necessary safeguards, leaving users exposed to the platform's solvency in the event of losses. The lack of transparency and insurance in these arrangements is also highlighted, with the report citing the collapse of Celsius Network and FTX as examples of the risks faced by users.
The report concludes that the weaknesses in the industry, including leverage, opacity, and deposit-like promises without protection, pose a significant risk to users and the wider financial system.