The Bank for International Settlements has released a report highlighting the growing trend of cryptocurrency exchanges offering services akin to traditional banking, such as lending and yield products, but without the protective measures and insurance that conventional financial institutions provide. According to the report, these exchanges are essentially operating as 'shadow banks,' where users are unknowingly extending unsecured loans. The report notes that the largest players in the crypto industry have evolved into multifaceted intermediaries, combining services that are typically separated across banks, brokers, and exchanges.
The rapid growth of 'earn' and yield products, which are widely marketed to retail users as a means to generate passive income from their crypto assets, is a major concern. While these products often promise attractive returns, they are structured more like unsecured lending than savings. The report warns that these platforms are taking deposits and reinvesting them into high-risk activities without the stability and safeguards that traditional banking provides.
In many cases, users relinquish control and ownership of their digital assets to the platform, which then utilizes the funds for lending, trading, or market-making strategies, with the returns paid to customers being a share of the profits generated from these activities. However, these arrangements lack the insurance and transparency offered by traditional finance, leaving users exposed to the platform's solvency in the event of losses.
The report cites the collapse of Celsius Network and FTX as examples of the weaknesses prevalent in the industry, where users were exposed due to a system built on leverage, opacity, and unprotected deposit-like promises. The BIS also references the flash crash of October 2025, which resulted in an estimated $19 billion in forced liquidations across crypto derivatives markets, as a demonstration of how quickly these dynamics can escalate.