# What Is "Rehypothecation" and How Is It Controversial in the Crypto Prime Brokerage Space? ▴ Learn

**Published:** 2025-11-08
**Categories:** Learn

---

## 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.

How Does the Lack of Traditional Regulatory Oversight Affect Crypto CCPs?

What Is the Concept of ‘Rehypothecation’ in Traditional Finance and How Does It Relate to DeFi?

How Does the Lack of Regulation in the Cryptocurrency Market Impact Investor Protection?

Differentiate between Illiquidity and Insolvency

## Discover More

- 
### [What Happens to a Call Option If the Crypto’s Price Does Not Rise?](https://crypto.greeks.live/learn/what-happens-to-a-call-option-if-the-cryptos-price-does-not-rise/)
![This stark visualization suggests the precise execution of a complex options pricing model applied to digital asset volatility surfaces. A multifaceted crystalline structure, resembling an arrow or a sharp fin array, penetrates a smooth, pale circular datum perhaps symbolizing a tokenized collateral pool or a block hash. The refractive quality of the material evokes the transparency and theoretical purity of Black Scholes Merton derivations in high-frequency trading environments. This intersection models the execution of synthetic asset creation or the finalization of an atomic swap protocol leveraging implied volatility skew against a stable foundational ledger entry, highlighting derivatives microstructure.](https://crypto.greeks.live/wp-content/uploads/2025/10/Crystalized-Geometric-Fin-Structure-Piercing-Digital-Asset-Datum-Through-Black-Void.jpg)

If the crypto price fails to surpass the strike price, the option expires worthless and the buyer loses the premium paid.

- 
### [What Is ‘Auto-Deleveraging’ (ADL) and How Is It Used by Crypto Exchanges?](https://crypto.greeks.live/learn/what-is-auto-deleveraging-adl-and-how-is-it-used-by-crypto-exchanges/)
![This macro view reveals polished metallic surfaces resembling a complex computational substrate or high-precision optical array fundamental to algorithmic execution. The subtle greenish-blue light reflection suggests advanced material science underpinning transparent settlement layers or quantum-resistant encryption structures vital for institutional DeFi integration. Key elements ▴ a cylindrical conduit and a matte termination component ▴ suggest critical infrastructure like a liquidity pool interface or a specialized oracle feed mechanism influencing option pricing models and synthetic asset valuation. Focus on slippage minimization, delta hedging protocols, and ensuring fair value discovery across decentralized exchanges DEXs defines this intricate setting, emphasizing robust execution frameworks beyond simple spot trading. The mirrored finish reflects potential arbitrage windows within cross-chain bridging solutions.](https://crypto.greeks.live/wp-content/uploads/2025/10/Microcosmic-Examination-of-Automated-Market-Maker-Mechanism-Parameters-in-Decentralized-Finance-Oracles.jpg)

ADL is a last-resort mechanism that forcibly reduces profitable traders' positions to cover bankrupt traders' losses after the insurance fund is depleted.

- 
### [Define a ‘Dormant’ Crypto Coin](https://crypto.greeks.live/learn/define-a-dormant-crypto-coin/)
![This visualization depicts a highly advanced structure suggesting complex algorithmic execution involving transparent crystalline struts emanating from a central nexus overlaid upon a reflective bluish-green planetary or spherical object potentially symbolizing a blockchain ledger or collateral pool. The sleek oblate spheroid component suggests a sophisticated directional antenna or transmission mechanism critical for instantaneous asynchronous communication necessary for high-frequency decentralized finance operations. Conceptualizing this within the derivative ecosystem, it represents robust multi-signature governance mechanisms securing exotic options structures like swaptions or barrier options traded across peer-to-peer interledger protocols utilizing zero-knowledge proofs for privacy preservation during liquidation events or margin calls related to perpetual futures contracts. The composition embodies resilient infrastructure for on-chain atomic settlement mitigating counterparty risk inherent in synthetic asset issuance governed by smart contract oracle feeds.](https://crypto.greeks.live/wp-content/uploads/2025/10/Decentralized-Autonomous-Organization-Structure-Encapsulating-Quantum-Secured-Cryptographic-Derivatives-Settlement-Matrix.jpg)

A coin with little recent trading, development, or community activity, often with extremely low volume.

- 
### [Explain the Difference between a Call Option and a Put Option in Crypto Derivatives](https://crypto.greeks.live/learn/explain-the-difference-between-a-call-option-and-a-put-option-in-crypto-derivatives/)
![The visualization suggests the structural integrity of a synthetic asset mechanism where pale beige central conduits interface with opposing convex surfaces colored deep cerulean and verdigris teal, resembling planetary hemispheres bisected. This configuration metaphorically maps to the bifurcated payoff structure of binary options or complex volatility surfaces within decentralized finance DeFi protocols. The central dark, semi-transparent module, speckled with light, implies an embedded execution layer or oracle feed influencing contract settlement mechanisms. It speaks to the delicate balancing act required for maintaining delta-neutrality across high-frequency trading strategies managing perpetual futures contracts or exotic options like straddles on volatile token pairs. The aesthetic evokes latent structure within automated market maker AMM bonding curves under extreme slippage conditions.](https://crypto.greeks.live/wp-content/uploads/2025/10/Symmetrical-Bifurcation-of-Digital-Asset-Derivatives-Across-Liquidity-Pool-Mechanisms.jpg)

A call option grants the right to buy; a put option grants the right to sell the underlying crypto at the strike price.

- 
### [What Is the Concept of ‘Tokenomics’ and Why Is It Crucial for a Crypto Project?](https://crypto.greeks.live/learn/what-is-the-concept-of-tokenomics-and-why-is-it-crucial-for-a-crypto-project/)
![This composition depicts a stylized, dark-field rendering of intersecting structural components mounted atop a curved base suggesting a central node or custody unit. The horizontal element, pale aqua, overlays a dark, textured trough suggestive of heterogeneous blockchain consensus mechanisms or mined liquidity pools. The intersection features a dark spherical node symbolizing settlement finality or a governance token nexus. Conceptually, this represents the complex interplay of perpetual swap funding rates and implied volatility measurement across DeFi options protocols. It visualizes the pressure dynamics inherent in managing delta hedging strategies against non-linear asset price discovery movements, emphasizing systematic risk associated with on-chain derivatives clearinghouses and novel synthetic asset issuance structures requiring robust oracle integration for accurate mark-to-market evaluation within DeFi ecosystems.](https://crypto.greeks.live/wp-content/uploads/2025/10/Decentralized-Ledger-Architecture-Illustrating-Cross-Asset-Volatility-Surface-Skew-in-Digital-Asset-Hedging-Instruments.jpg)

The economic model governing a token's creation, distribution, and utility; crucial for ensuring long-term health, security, and value accrual.

- 
### [What Is a ‘Stablecoin’ and What Problem Does It Aim to Solve in Crypto?](https://crypto.greeks.live/learn/what-is-a-stablecoin-and-what-problem-does-it-aim-to-solve-in-crypto/)
![This visual depicts a complex mechanical nexus resembling four intersecting, metallic blades mounted on a dark, curved substrate, suggestive of high-frequency execution systems. The central assembly features one blade exhibiting a granular, speckled texture juxtaposed against smooth, anodized surfaces, symbolizing differing material properties or aggregated data states within decentralized finance. This configuration metaphorically represents the calibration of the volatility surface, crucial for accurate pricing of exotic options like barrier reverse convertibles or Asian options in decentralized exchanges DEXs. The structure implies systemic alignment necessary for perpetual swaps hedging, managing slippage, and optimizing automated market maker AMM liquidity provisions against sudden capital inefficiency events in digital asset contract settlement. Precise engineering reflects deterministic algorithm execution required for alpha generation in cross-margin environments and delta hedging complex derivative books.](https://crypto.greeks.live/wp-content/uploads/2025/10/Advanced-Volatility-Surface-Calibration-Mechanism-Involving-Bifurcating-Asymmetric-Hedging-Instruments.jpg)

A crypto pegged to a stable asset (like USD) to solve the high volatility problem, enabling stable transactions and DeFi collateral.

- 
### [What Is Implied Volatility and Why Is It Crucial for Crypto Options Pricing?](https://crypto.greeks.live/learn/what-is-implied-volatility-and-why-is-it-crucial-for-crypto-options-pricing/)
![A translucent, near-spherical object rests precariously on a sharp white linear plane contrasting against deep black negative space, mirroring complex financial geometries. This composition visualizes the dynamic interplay within decentralized finance derivatives markets. The sphere's reflectivity captures distorted ambient light, symbolizing the inherent opacity in certain off-chain settlement mechanisms or exotic option structures like Asian baskets. The sharp transition between muted gray and bright cyan planes suggests the bifurcation of asset pricing, potentially modeling forward volatility surfaces or the delta hedging challenges posed by high-frequency blockchain transactions. It evokes the precise calibration required for synthetic asset replication and managing systemic counterparty risk in perpetual futures contracts. The image captures the tension between realized price action and implied distribution skew across various strike prices.](https://crypto.greeks.live/wp-content/uploads/2025/10/Reflective-Sphere-Oscillation-on-Oblique-Planes-Signaling-Volatility-Surface-Implied-Skew.jpg)

Implied volatility is the market's future volatility expectation, directly determining the option's premium.

- 
### [How Does Institutional Participation Impact the Overall Crypto Market Volatility?](https://crypto.greeks.live/learn/how-does-institutional-participation-impact-the-overall-crypto-market-volatility/)
![This macro shot captures a delicate equilibrium featuring two sharply tapered instruments ▴ one dark and one teal ▴ arrayed against a dark backdrop, suggestive of advanced algorithmic trading systems. A perfect glass sphere precariously rests upon the lower teal rod, symbolizing the volatile yet precise nature of asset pricing within decentralized finance protocols. This configuration visualizes the fine-grained management required for executing complex structured products like options overlays or perpetual swap settlements where slippage must approach zero. The image evokes concepts of oracle data integrity ensuring accurate strike price resolution and the tension between impermanent loss mitigation and yield farming maximization across various DeFi primitives, balancing risk management against speculative derivatives exposure.](https://crypto.greeks.live/wp-content/uploads/2025/10/Microstructure-of-Precision-Executions-Balancing-Volatility-Through-Decentralized-Financial-Primitives.jpg)

Institutions can stabilize prices through liquidity and hedging, but their large orders can also trigger significant volatility spikes.

- 
### [What Is the Primary Risk of Leaving Crypto on a Centralized Exchange?](https://crypto.greeks.live/learn/what-is-the-primary-risk-of-leaving-crypto-on-a-centralized-exchange/)
![The sleek, stylized mechanical assembly, resembling a high-precision bolt action or control interface, traverses against a deep void juxtaposed with a mottled cyan and dark blue exoplanet. This visual metaphor encapsulates the delicate precision required for managing complex DeFi primitives like options vault collateralization or managing governance tokens within a DAO structure. The prominent lever, with its high-gloss cerulean orbs, suggests actuation akin to executing a significant liquidation event or adjusting delta hedging parameters in perpetual swaps trading. Such imagery speaks to the deterministic yet aesthetic nature of smart contract execution, controlling vast digital assets with granular control mechanisms, perhaps referencing the secure finality of block confirmations or managing liquidity pool ratios through transparent, auditable mechanisms embodying blockchain immutability and operational security.](https://crypto.greeks.live/wp-content/uploads/2025/10/Futuristic-Lever-Mechanism-Over-Planetary-Body-Symbolizing-Decentralized-Autonomous-Organization-Governance-Mechanisms.jpg)

Loss of control due to exchange hack, insolvency, or regulatory freezing of assets.

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**Original URL:** https://crypto.greeks.live/learn/what-is-rehypothecation-and-how-is-it-controversial-in-the-crypto-prime-brokerage-space/
