The Bank for International Settlements has issued a warning that cryptocurrency exchanges are increasingly providing financial services similar to those of traditional banks, but without the same level of protection for users. According to the report, these exchanges are evolving into complex financial institutions that offer a range of services, including lending and yield products, which are often marketed as high-yield savings products but are actually unsecured loans to lightly regulated entities. The report highlights the rapid growth of 'earn' and yield products, which are widely marketed to retail users as a way to generate passive income on their crypto assets, but are structured more like unsecured lending than traditional savings products.
This poses a significant risk to users, as these platforms are effectively taking deposits and using them for risky activities without the safeguards that make traditional banking stable. In many cases, users relinquish control and ownership of their digital assets to the platform, which then uses the funds for various investment strategies, with the returns paid to customers being a share of the profits generated. However, these arrangements lack the insurance and transparency of 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 in the industry, highlighting the need for greater regulation and protection for users.