I recently came across a research report published by the Bank for International Settlements (BIS), which is quite worth paying attention to. They deeply analyzed the operational models of institutions like crypto trading platforms and frankly pointed out the truth behind high-yield investments in the crypto space.

Honestly, many people are blinded by "high returns." Those Earn programs or financial products packaged by exchanges sound like passive income falling from the sky. But BIS’s report reveals a key fact: these so-called financial products are essentially unsecured loans. The assets you deposit are rehypothecated by the platform, which then cycles into leveraged trading, margin lending, and other high-risk activities. The most heartbreaking part is that, unknowingly, you have actually given up real control over these assets.

This model is completely opposite to traditional finance. Traditional banks have strict risk isolation, with different businesses separated into different entities. But crypto exchanges are the opposite—they combine trading, custody, proprietary trading, and brokerage services all on one platform, with layered risks. There are no reserve requirements, no regulations for segregated asset custody; in plain terms, they are shadow banks cloaked in technology.

What if the platform fails? Your assets become ordinary creditors at the end of the liquidation hierarchy, with no deposit insurance or central bank rescue. This is not alarmist—last October’s crypto market flash crash is a vivid lesson. In just 24 hours, the entire network forcibly liquidated $19 billion, Bitcoin dropped over 14%, more than 1.6 million traders were liquidated, and the market cap evaporated by $350 billion.

BIS specifically mentioned the collapses of Celsius and FTX. These platforms were built on leverage, opaque promises, and lack of risk management. The crypto market heavily relies on automated liquidation engines, with trading depth concentrated on a few large platforms. Once confidence collapses, the chain reaction can be very intense.

What’s more troublesome is that the integration of crypto and DeFi makes the risk contagion pathways more complex. The recent KelpDAO hacker incident reflects this problem. Attackers exploited vulnerabilities to mint a large amount of tokens, then used platforms like Aave for collateralized borrowing, ultimately causing a nearly $300 million funding gap. A single protocol vulnerability can trigger liquidity crises across the entire ecosystem.

In the report, BIS recommends adopting a dual-track regulatory approach—regulating both institutions and specific activities. But in reality, regulators face many issues such as lagging legal frameworks, cross-border cooperation difficulties, and limited resources. If these problems aren’t solved, the systemic risks hidden in the crypto space will continue to threaten global financial stability.

Ultimately, high returns often hide high risks. Before investing in crypto, you must truly understand what kind of risks you are taking on.