Crypto Exchanges Risk Becoming 'Shadow Banks' Without Adequate Safeguards

The Bank for International Settlements (BIS) has issued a warning about the growing trend of major crypto exchanges offering bank-like services, including loans and yield products, without adequate safeguards.

According to the BIS report, these exchanges are becoming multifunctional intermediaries that combine the roles of banks, brokers, and exchanges. This shift is raising concerns about the risks of 'shadow banking' in the crypto sector.

The report highlights the spread of interest and yield products aimed at retail investors as a major risk factor. These products resemble savings-style products but have a structure closer to lightly regulated, unsecured shadow-bank lending.

The BIS noted that users of these exchanges often hand over control of their digital assets and transfer ownership to the platform, which then uses those assets for lending, trading, and market making. This lack of transparency and oversight leaves users directly exposed to the risk of the platform's ability to pay if losses occur.

The report cites the collapses of Celsius Network and FTX as examples of vulnerabilities in this structure. These cases demonstrate how structures built on leverage, opacity, and deposit-like promises without safeguards can collapse.