Rehypothecation
Reusing assets that customers pledged or deposited as if they were the firm's own - lending them out, posting them as collateral, stacking claims on the same coins. The hidden mechanism under the 2022 crypto-lender collapses.
Rehypothecation is a term from traditional finance. A firm takes an asset that a customer has pledged or deposited and reuses it for its own purposes: lending it out, posting it as collateral, or pledging it again to someone else. With clear limits and disclosure, it's a normal part of how banks and brokerages work. Without those limits, and out of sight, it's how a single coin can end up backing several different claims at the same time.
This is the mechanism underneath the 2022 crypto-lending collapse. "Earn interest on your crypto" and "your funds are safe with us" were describing the same thing: deposits that were marketed like a savings account but were actually lent into leverage, sometimes reused several times over. BlockFi, Celsius, and the lenders around them paid their yields by relending customer coins to trading firms, which leveraged them again.
The problem isn't reuse on its own. It's reuse that's hidden and uncapped. When the chain is invisible, you can't see how many claims are stacked on top of your coins, or that your "deposit" has become the bottom of a leverage tower. When the top of that tower falls, the losses come all the way down to you, and nobody told you that you were the one carrying the risk. This is the clearest reason to hold your own keys with self-custody: coins you control can't be reused by anyone else.
See Mt. Gox to FTX: The Custody Graveyard for the collapses this mechanism caused.
Key takeaways
- Rehypothecation is a firm reusing customer-pledged assets for its own borrowing or lending
- Crypto lenders took deposits marketed as safe and lent them into leverage, sometimes several claims deep on the same coins
- When the underlying bet failed, depositors discovered they were unsecured creditors of a chain of reuse they never saw