The Bank for International Settlements has issued a report stating that cryptocurrency exchanges are increasingly providing financial services similar to traditional banks, such as lending and yield products, but lack the protection and security that conventional financial institutions offer. According to the report, what appears to be a high-yield savings product is essentially an unsecured loan to a lightly regulated entity. The report highlights the rapid growth of 'earn' and yield products, which are widely marketed to retail users as a means to generate passive income from their cryptocurrency assets. However, these products are structured more like unsecured lending than savings, and their attractive returns come with significant risks.
The report notes that these platforms take deposits and reuse them for risky activities without the stability guarantees of traditional banking. In many cases, users relinquish control and ownership of their digital assets to the platform, which then utilizes the funds for various strategies.
The report warns that users are exposed to the platform's solvency in the event of losses and lack the insurance and transparency offered by traditional finance. The collapse of Celsius Network and FTX is cited as examples of the weaknesses in the industry, where poor management and a lack of protection led to significant losses.
The report emphasizes that the cryptocurrency industry's largest players have evolved into multifunctional intermediaries, offering a range of services that would typically be separated across banks, brokers, and exchanges.