The Bank for International Settlements has issued a warning that cryptocurrency exchanges are increasingly offering services similar to those of traditional banks, such as lending and yield products, but without the same level of protection for users. According to the report, these services, which include 'earn' and yield products, are often marketed as a means for retail users to generate passive income from their crypto assets, but in reality, they function more like unsecured loans to lightly regulated entities.
The report highlights the rapid growth of these products and the lack of transparency and safeguards, such as insurance, that are typically found in traditional banking. This leaves users exposed to the risk of losses, as seen in the collapse of Celsius Network and FTX, which were cited as examples of the weaknesses in the industry. The report notes that users often relinquish control of their assets to the platforms, which then use the funds for various activities, with the returns paid to customers being a share of the profits generated.
However, this arrangement lacks the stability and security of traditional banking, and the report warns that users are essentially making an unsecured claim on the intermediary, leaving them vulnerable to the platform's solvency in the event of losses.