Earned rewards may risk losing the principal? BIS warns: "High-yield financial products" in crypto are actually unsecured loans

Author: Max, Crypto City

From trading platforms to “omnipotent institutions,” MCIs are blurring financial boundaries
The Bank for International Settlements (BIS) recently released a 38-page research report revealing that large global cryptocurrency exchanges are rapidly transforming into “Multifunction Crypto-asset Intermediaries” (MCIs). These institutions, under a single corporate structure, highly integrate multiple functions such as trading platforms, custody services, proprietary trading, brokerage, and token issuance.
BIS, owned jointly by 63 central banks worldwide, emphasizes that this operational model runs counter to the risk isolation principles of traditional financial markets. In conventional finance, roles are typically separated into different independent entities with strict firewalls to prevent conflicts of interest and risk contagion.
However, cryptocurrency exchanges tend to adopt a vertical integration model, deeply tying customer assets to the platform’s own operational risks. This structure lacks transparency in operations, and without reserve requirements or regulations for segregated assets, these platforms essentially become “shadow banks” with extremely loose regulation.

The truth behind high yields: user assets become unsecured loans
Major crypto exchanges are actively marketing high-yield products like “Earn” or “financial plans,” packaging them as convenient passive income tools.
The BIS report bluntly states that these financial products are essentially unsecured loans to the platform. When users deposit crypto assets in exchange for returns, the platform often engages in “rehypothecation,” recycling these assets into high-risk activities.
These activities include margin lending, highly leveraged proprietary trading, and market liquidity provision.
Under this mechanism, users often unknowingly relinquish legal ownership or actual control of their assets. If the platform faces a liquidity crisis, users will directly bear the platform’s debt repayment risk and become ordinary creditors at the end of the repayment hierarchy.
Unlike regulated traditional bank deposits, these assets lack deposit insurance protections and are not supported by central banks as lenders of last resort. This cycle of customer assets being funneled into high-risk gambles introduces significant instability into the digital asset market.

Lessons from the FTX collapse and the $19 billion flash crash
The crypto flash crash in October 2025 clearly demonstrated the destructive power of leverage feedback loops. In just 24 hours, impacted by macroeconomic shocks, the entire network experienced forced liquidations totaling up to $19 billion. Bitcoin’s single-day drop exceeded 14%, leading to about 1.6 million traders facing liquidation, and the total crypto market cap evaporated by $350 billion in one day.
The BIS report specifically highlights the collapses of Celsius Network and FTX as typical lessons built on leverage, opaque promises, and poor risk management. It notes that the crypto ecosystem relies heavily on automated liquidation engines, with trading depth concentrated on a few large platforms.
When market confidence collapses, this structure can trigger severe chain reactions. Furthermore, as the crypto market becomes more intertwined with banks and stablecoin issuers, the failure of this shadow banking system could have serious spillover effects on the broader traditional financial industry.

Regulatory lag and hacking: the “infection pathways” of decentralized finance
The high integration of crypto markets and decentralized finance (DeFi) further amplifies the risk of contagion. A recent example is the KelpDAO protocol attack. The attacker exploited a vulnerability to mint about 116,500 $rsETH tokens, which were used as collateral to borrow large amounts from platforms like Aave, ultimately resulting in a shortfall of approximately $292 million.

• Related news: DeFi shock: Kelp DAO cross-chain bridge hacked, nearly $300 million lost, affecting multiple lending protocols

This incident shows that a single protocol’s vulnerability can trigger liquidity crises across the entire ecosystem. Security analysis indicates that the attack was linked to North Korea’s Lazarus Group, which converted 75,700 ETH into Bitcoin within 1.5 days and contributed about $910k in transaction fees to the THORChain platform.
To address these increasingly complex challenges, BIS recommends adopting a dual-track approach combining “entity-based” and “activity-based” regulation. Regulatory agencies still face challenges such as lagging legal frameworks, cross-border cooperation difficulties, and limited regulatory resources. Without effective prudential regulation and international oversight, the hidden risks in the crypto market will continue to threaten global financial stability.