Crypto lending vaults have attracted over $10 billion in deposits as investors look to generate returns from their digital assets, the Financial Times reported. But the expansion of these products is also drawing attention to risks involving collateral, liquidity and smart-contract security, as regulators consider tighter oversight.

Deposits have increased from approximately $4 billion at the beginning of last year, reflecting growing demand for services that lend out stablecoins and other crypto tokens to earn yields.

Operating through smart contracts on decentralized finance (DeFi) platforms, these vaults are overseen by curators who choose lending strategies, define risk limits and collect fees. Returns typically fall between 3% and 10%, while more aggressive strategies may offer annual yields of 20% or higher.

Despite the potential for higher earnings, investors face several risks. Loans may be backed by assets that are difficult to trade, including illiquid tokens, crypto-backed stablecoins and tokenized private credit. A decline in collateral values or a lack of buyers could leave depositors exposed to losses.

Forced liquidations can deepen market declines, while smart-contract exploits, coding errors and faulty pricing mechanisms create additional vulnerabilities. Although users can inspect publicly available smart contracts, attractive yield figures may distract them from the risks associated with the assets supporting each strategy.

Fintech firms, digital asset treasury companies and hedge funds are among the major depositors participating in the market, according to the report.

Bitcoin-backed lender Two Prime has also moved into the sector. The company launched a Bitcoin lending vault on Pareto in September, targeting annual returns of 1.5% to 2% through lending to institutional borrowers. The vault accepts wrapped Bitcoin (WBTC), sets a minimum deposit of 5 WBTC and has about $10 million of Two Prime’s own funds committed to cover initial losses.

Authorities are examining whether existing financial regulations adequately cover these products. The U.S. Securities and Exchange Commission has raised questions about vaults holding securities, while European regulators have proposed oversight of intermediaries that provide access to decentralized finance platforms.