Earning rewards but risking your principal? BIS warns: "High-yield investment" in the crypto world is actually unsecured lending

Author: Max, Crypto City From trading platforms to "all-in-one 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). Under a single corporate structure, these institutions highly integrate multiple functions such as trading platforms, custodial services, proprietary trading, brokerage services, and token issuance. The BIS, owned by 63 central banks worldwide, emphasizes that this operational model runs counter to the risk segregation principles of traditional financial markets. In the traditional financial system, to prevent conflicts of interest and risk contagion, the aforementioned roles must typically be separated into distinct independent entities with strict firewalls. However, crypto exchanges tend to adopt a vertically integrated model, deeply binding client funds with the platform's own operational risks. This structure lacks operational transparency and lacks regulations for reserve requirements and the segregation of assets, effectively making these platforms "shadow banks" with extremely loose regulation. The truth behind high yields: User assets become unsecured loans Major crypto exchanges are currently actively promoting high-yield products such as "Earn" or "wealth management plans" to retail investors, packaging them as convenient passive income tools. The BIS report bluntly states that the essence of these wealth management products is providing unsecured loans to the platform. When users deposit crypto assets in exchange for a yield, the platform typically "rehypothecates" these assets, recycling them 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. Once a platform faces a solvency crisis, users directly face the credit risk of the platform entity and become general creditors at the end of the liquidation sequence. Unlike regulated traditional bank deposits, these assets completely lack deposit insurance protection and have no central bank to provide support as a lender of last resort. This behavior of recycling client assets into high-risk gambles has buried huge instability factors in the digital asset market. Lessons from the FTX collapse to the $19 billion flash crash The cryptocurrency flash crash in October 2025 clearly demonstrated the destructive power of leverage feedback loops. In just 24 hours, affected by macroeconomic shocks, the total network forced liquidation amount reached $19 billion. At that time, Bitcoin fell by more than 14% in a single day, causing approximately 1.6 million traders to face liquidation, and the total market capitalization of the crypto market evaporated by $350 billion in one day. In the report, the BIS specifically named the collapse of Celsius Network and FTX, calling them typical lessons built on leverage, opaque promises, and a lack of risk management. The report points out that the crypto system is highly dependent on automated liquidation engines, and trading depth is highly concentrated in a few large platforms. When market confidence collapses, this structure triggers violent chain reactions. Furthermore, as the crypto market's ties to banks and stablecoin issuers deepen, the failure of this shadow banking system could have serious spillover effects on the broader traditional financial industry. Regulatory lag and hacker intrusions, the "contagion path" of DeFi The high degree of integration between the crypto market and Decentralized Finance (DeFi) further exacerbates the possibility of risk contagion. The recent KelpDAO protocol attack is a typical case. The attacker exploited a vulnerability to mint approximately 116,500 $rsETH and used it as collateral to borrow a large amount of assets from major lending platforms like Aave, ultimately causing a funding gap of approximately $292 million. Such events show that a vulnerability in a single protocol can trigger a liquidity crisis across the entire ecosystem. Security analysis shows that this attack is related to the North Korean Lazarus Group. The hackers laundered 75,700 ETH into BTC within 1.5 days and contributed approximately $910,000 in transaction fee revenue to the THORChain platform. To address increasingly complex challenges, the BIS recommends adopting a dual-track model of "Entity-based" and "Activity-based" regulation. Regulatory agencies still face challenges such as lagging legal frameworks, difficulties in cross-border collaboration, and limited regulatory resources. If effective prudential regulation and transnational supervision cannot be implemented, the implicit risks of the crypto market will continue to threaten global financial stability.