The Bank for International Settlements has released a report highlighting the growing trend of cryptocurrency exchanges offering bank-like 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 include 'earn' and yield products, are often marketed to retail users as a means of generating passive income on their crypto assets, but in reality, they function more like unsecured loans to lightly regulated 'shadow banks'. The report notes that the largest players in the crypto industry have evolved beyond simple trading platforms into multifunctional intermediaries, offering a range of services that would typically be separated across banks, brokers, and exchanges.
The rapid growth of 'earn' and yield products is a major concern, as they are widely marketed to retail users and often promise attractive returns, but their structure is closer to unsecured lending than savings. The report warns that these platforms are effectively taking deposits and recycling them into 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 a significant concern, with users often relinquishing control and ownership of their digital assets to the platform. The report cites the collapse of Celsius Network and FTX as examples of the risks posed by these weaknesses in the industry, highlighting the need for greater regulation and oversight to protect users.