BIS Points Out That Large Crypto Exchanges Act as Unlicensed, Uninsured Shadow Banks
The Financial Stability Research Group under the Bank for International Settlements (BIS) stated in its latest FSI Paper that large crypto exchanges effectively act as unlicensed, uninsured shadow banks through products like "wealth management," "Earn," and "yield accounts." Users deposit tokens into the platform to receive seemingly stable returns, but legally, these assets are treated as unsecured claims against the platform rather than protected bank deposits. The report emphasizes that exchanges often invest pooled customer funds into high-risk proprietary trading, over-the-counter lending, and complex derivatives strategies, lacking disclosure and capital constraints. In the event of losses, users are directly exposed to the platform's solvency risks, without any "lender of last resort," deposit insurance, or orderly bankruptcy resolution framework to rely on.
BIS views the collapses of Celsius Network and FTX as typical cases of this model's failure, noting that both attracted large amounts of user funds with "seemingly low-risk, easily accessible yield products," which were then mixed with proprietary trading and high-leverage positions, ultimately revealing a massive funding gap when the market reversed, leaving users to queue as ordinary creditors for repayment. The report also cites the October 2025 crypto flash crash: within less than 24 hours, approximately $19 billion in leveraged positions were forcibly liquidated, around 1.6 million accounts were cleared, Bitcoin's intraday drop exceeded 14%, and the overall market value evaporated by about $350 billion. This event exposed how high leverage, automatic liquidation engines, and weak order book liquidity can rapidly amplify price and liquidity shocks when tightly coupled on the same platform.
Source: Public Information
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BIS defines the exchange "yield products" as shadow banking, focusing on how they replicate key banking functions—maturity transformation, risk concentration, and credit creation—while being completely detached from traditional prudential regulation and safety nets. For users, the interface and wording suggest "deposits + interest," but the real legal relationship is "lending unsecured loans to an institution that does not disclose its balance sheet, has no capital requirements, and is not subject to stress tests." This mismatch can easily evolve into a cycle of "bank runs + liquidations + chain defaults" in an environment of rising interest rates and amplified asset price volatility.
The cases of Celsius and FTX concretize this structural flaw: platforms attracted billions of dollars with "wealth management" and "high-yield stablecoin accounts," then rolled the funds into proprietary arbitrage, VC investments, and high-leverage on-chain positions, maintaining the illusion of "redeemable at any time" with paper profits during bull markets, and delaying collapse during bear markets through withdrawal thresholds, asset freezes, and internal transfers until liquidity was completely exhausted. Users later discovered that they were neither protected depositors nor secured priority creditors, but merely ordinary creditors in bankruptcy proceedings—similar to the structure of money market funds acting as pseudo-deposits in the shadow banking system before 2008.
The October 2025 flash crash reveals another dimension: even without the immediate bankruptcy of a single platform, excessive leverage and centralized liquidation engines can create systemic price and liquidity shocks in a very short time. When multiple large exchanges execute forced liquidations under similar automatic liquidation logic at similar price thresholds, the market can instantly enter a "no-bid" state, with order book depth shrinking by over 90%, spreads expanding from a few basis points to several dozen percentage points, and prices no longer reflecting fundamentals but driven by liquidation algorithms. This structure does not require a bank run and can replay a "decentralized version of a liquidity crisis" on the asset side and leverage chain.
In a broader financial stability framework, BIS's concerns focus on one issue: as these shadow bank-like platforms deepen their connections with the traditional financial system—such as through stablecoin reserves, bank custody, brokerage interfaces, or publicly traded companies holding crypto—their risks are no longer confined to "volatility within the crypto circle" but may spread outward through price shocks, margin calls, and credit exposures. Once crypto assets are used more broadly as collateral or part of investment portfolios, such "uninsured, high-leverage, opaque" intermediaries could become another cross-market contagion pathway. For regulators, the "wealth management products" of crypto exchanges are not just a consumer protection issue but a systemic variable in preventing the shadow banking chain from spiraling out of control in the next round of stress scenarios.