Services from “multifunction cryptoasset intermediaries” (MCIs) include things like lending and yield products, minus the protections that come with traditional financial institutions, according to the report issued Thursday (April 23) by the Bank for International Settlements (BIS).

“Customers may regard MCIs as safe places to hold their digital assets, yet in many jurisdictions these platforms operate without the prudential safeguards, such as capital and liquidity requirements, that typically apply to financial intermediaries engaged in comparable risk transformation,” the report said.

“For example, cryptoasset borrowing and lending remain outside the regulatory perimeter in many jurisdictions. This regulatory gap reflects a broader asymmetry: traditional banks’ direct exposures to cryptoassets remain small, while a ‘shadow crypto financial system’ of lightly regulated MCIs has grown to serve both retail and institutional clients.”

The report added that the size of the biggest NCIs, and their increasing connection to traditional finance, means a disruption at a major cryptocurrency firm could have consequences outside of the crypto space.

The events of 2022 underscore this risk. When crypto lender Celsius imploded, it triggered failures across intertwined platforms. Celsius could not meet redemptions, which led to the insolvency of crypto hedge fund Three Arrows Capital, “which had extensive borrowing ties.”

“This contagion culminated in FTX’s collapse, in which losses from its affiliate Alameda Research spread across the group,” said the report.

The report notes that its findings are not necessarily a reflection of the BIS and its associated banks and organizations.

In other digital asset news, PYMNTS wrote Wednesday about the potential for new merchant opportunities as crypto payments experience a resurgence.

“The early promise of crypto payments was a disarmingly simple one of faster, cheaper and borderless transactions. The reality of that earlier era, as merchants quickly discovered, was anything but,” the report said.

“Fragmented blockchains, volatile assets, inconsistent user experiences and opaque settlement processes turned what was supposed to be a next-generation checkout feature into an operational burden.”

Now, the trajectory of crypto payments seems increasingly in line with the wider evolution of financial infrastructure, rather than at odds with it.

It’s happening amid new U.S. legislation introduced to create a federal registration pathway for nonbank providers hoping to gain direct access to the Federal Reserve’s core payment rails, including Fedwire, the FedNow® Service and ACH.

“Crypto firms, along with more traditional FinTechs, would be among the biggest beneficiaries of the bill,” PYMNTS added.