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.
Glossar
Rehypothecation
Practice ⎊ This involves the reuse of collateral that has been posted by one counterparty to secure obligations with a second counterparty, often without explicit notification to the original collateral provider.
Prime Broker
Facilitation ⎊ A prime broker, within cryptocurrency derivatives and options trading, functions as an intermediary providing services to hedge funds and other large institutional investors.
Crypto Prime Brokerage
Service ⎊ Crypto Prime Brokerage integrates custody, clearing, financing, and sophisticated trading execution services specifically tailored for institutional participants in the digital asset and derivatives landscape.