Rehypothecation

Rehypothecation

Rehypothecation of crypto assets refers to the practice where a lender or financial institution uses the crypto assets deposited by its clients as collateral to secure its own loans or other financial transactions. This practice is common in traditional finance with securities or other assets but is Riskier in the crypto space due to its custody and ownership by the entity. The FTX and Cypress bankruptcies were the result of re-hypothecating the deposited crypto, resulting in significant losses due to mis-management and or fraud.  We use a Third party, Anchorage Digital (Link https://www.anchorage.com) as a neutral custodian.  Anchorage is the only US federally chartered crypto bank, Anchorage Digital Bank NA.  Your Crypto can not be Re-hypothecated in this construct, and you maintain your Key to this depository account.

1. Use of Collateral:
   A Lender might take the crypto assets you deposit and use them to secure loans or other obligations for their purposes, taking complete custody of your Crypto leaving you with no control of your asset(s).
2. Risk to the Owner:
   • If the institution rehypothecating your assets fails (e.g., bankruptcy), you will lose access to your crypto assets.
   • The institution's obligations could take precedence over your claims, depending on the terms of the rehypothecation agreement.
3. Transparency and Consent:
   • Rehypothecation should be explicitly disclosed and agreed upon by the asset owner.
   • Without such consent, rehypothecation could be deemed unethical or illegal.
4. Potential Benefits:
   • Rehypothecation might allow institutions to offer better terms or rates to customers (e.g., lower fees, higher yields).
   • Institutions may generate additional revenue streams, possibly benefiting end-users in some arrangements.
5. Rehypothecation-Free Services:
   If you are storing crypto with a custodian or using a platform offering lending services, it is crucial to review their terms and conditions to understand whether rehypothecation is involved and its potential implications for your assets.

If you are storing crypto with a custodian or using a platform offering lending services, it is crucial to review their terms and conditions to understand whether rehypothecation is involved and its potential implications for your assets.