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 exchanges have evolved into complex financial institutions, providing a range of services that would typically be offered by separate entities, including banks, brokers, and exchanges.
The report highlights the rapid growth of 'earn' and yield products, which are often marketed to retail investors as a way to generate passive income from their crypto assets. However, these products are often structured more like unsecured loans than traditional savings products, and they lack the safeguards and insurance that are typically provided by traditional banks.
The report notes that users of these platforms often relinquish control and ownership of their assets, which are then used for lending, trading, and market-making strategies, with the returns paid to customers being a share of the profits generated from these activities. The lack of transparency and insurance in these arrangements leaves users exposed to significant risks, including the solvency of the platform.
The report cites the collapse of Celsius Network and FTX as examples of the risks posed by these weaknesses in the industry. The BIS warns that the system is built on leverage, opacity, and deposit-like promises without protection, and that users are vulnerable to significant losses in the event of a collapse.