The BIS says big crypto exchanges now function as lightly regulated “shadow banks,” turning user deposits into unsecured loans and amplifying leverage that helped trigger a $19B 2025 wipeout.
Summary
- The Bank for International Settlements (BIS) says major crypto exchanges now resemble “shadow banks” but lack regulation and deposit protection.
- High-yield “earn” products are effectively unsecured loans to opaque trading and lending operations, leaving users exposed in a crisis.
- The BIS highlighted Celsius and FTX as cautionary examples and pointed to a $19 billion liquidation cascade in October 2025 as evidence of systemic risk.
Cryptocurrency exchanges are rapidly evolving into “shadow banks” that offer lending and yield products without the safeguards of traditional finance, exposing users to unprotected credit and liquidity risks, according to a new report from the Bank for International Settlements. The BIS warned that leading platforms have expanded from pure trading venues into “multi-functional intermediaries” that combine the roles of banks, brokerages, and exchanges but operate with limited transparency, weak risk segregation, and no formal deposit insurance.
The report argues that the high-yield “earn” and savings products marketed by many exchanges are “essentially closer to unsecured loans,” since user assets are rehypothecated into activities such as margin lending, proprietary trading, and market making. In practice, customers become unsecured creditors of the platform, meaning that “if the platform encounters problems, users are directly exposed to repayment risk” instead of enjoying the senior protections that bank depositors receive under regulated regimes.
Multifunction exchanges, opaque risks
BIS researchers say the rise of so‑called multifunction crypto-asset intermediaries — firms that issue tokens, run trading platforms, offer leverage, custody, and structured products under one roof — has created concentrated points of failure in the digital asset ecosystem. Many of these bundled activities would be separated, subject to capital rules, or firewalled by regulation in traditional finance, but in crypto they are often “vertically integrated” inside a single corporate structure.
The report cites the collapses of Celsius Network and FTX as emblematic of these structural weaknesses, noting how both platforms mixed customer funds with proprietary bets while promising ostensibly low-risk yield and easy withdrawals. When those bets turned against them, customers discovered they held only general creditor claims, with no deposit insurance, lender-of-last-resort backstop, or orderly resolution framework.
$19B flash crash shows leverage feedback loop
To illustrate the systemic implications, the BIS points to the October 2025 crypto flash crash, when more than $19 billion in leveraged positions were forcibly liquidated within roughly 24 hours after a sharp macro shock. Data compiled by market analysts and consultants show that over 1.6 million traders were liquidated as cascading margin calls swept through major exchanges, with Bitcoin dropping more than 14% in a day and total digital asset market capitalization shrinking by around $350 billion.
According to post‑mortem studies, the episode exposed how tightly coupled high leverage, automated liquidation engines, and thin liquidity on a handful of dominant venues have become. The BIS warns that, as these exchanges continue to layer bank‑like services on top of speculative trading, their failure “could be significant for the broader cryptoasset ecosystem” and might become a channel for spillovers into the traditional financial system if links to banks and stablecoin issuers deepen.
