What Is “Rehypothecation” and How Is It Controversial in the Crypto Prime Brokerage Space?
Rehypothecation is the practice where a prime broker uses a client's posted collateral for its own purposes, such as lending it out or using it as collateral for its own trades. It is controversial in crypto because it exposes client assets to the broker's insolvency risk, which is often not fully disclosed or regulated.
This practice led to major issues during the 2022 crypto market downturn when firms engaged in it failed.
