Rehypothecation

Rehypothecation refers to the practice of leveraging pledged assets to create additional credit and facilitate multiple financial transactions using the same underlying collateral. To fully grasp this concept, it’s important to first understand hypothecation—the act of offering assets as security for a loan while retaining ownership.

In contrast, rehypothecation involves a financial institution reusing the already pledged collateral for its borrowing purposes. For instance, when a hedge fund deposits securities with a prime broker as collateral, the broker—under specific agreements—can reuse those securities as collateral to secure its own loans or financial arrangements.

Rehypothecation in Traditional and Digital Finance: Enhancing Liquidity or Undermining Stability?

Rehypothecation typically occurs when a broker-custodian lends funds to a client for asset purchases and subsequently reuses those same assets as collateral. This practice enhances market liquidity, broadens capital access for businesses, and can yield broader economic benefits.

However, in the context of the digital economy, rehypothecation has faced criticism for potentially destabilizing the cryptocurrency ecosystem. Critics argue it can suppress Bitcoin (BTC) prices and weaken blockchain integrity by shifting ownership claims off-chain—claims that may not correspond to actual holdings. Despite these concerns, Bitcoin’s value has surged more than threefold since 2018, indicating that any suppressive effects may have been limited.

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