Define “Rehypothecation” and Its Implications for Crypto Collateral

Rehypothecation is the practice where a prime broker or custodian re-uses a client's posted collateral for their own purposes, such as lending it out or using it to cover their own margin requirements. While common in traditional finance, it is a significant risk in crypto, as it exposes the client's assets to the broker's own credit risk and can complicate recovery in the event of the broker's bankruptcy.