Rehypothecation
A custodian or platform re-using a customer's deposited assets for its own purposes, such as lending them out, rather than simply holding them.
Rehypothecation occurs when a custodian or platform re-uses a customer's deposited assets for its own purposes — such as lending them to someone else or posting them as collateral elsewhere — rather than simply holding them securely and separately on the customer's behalf.
Rehypothecation is a documented contributing factor in several well-known crypto lending-platform failures, since it means a customer's "deposited" assets may not actually be sitting safely in reserve at all, but rather already lent out or otherwise encumbered elsewhere, creating risk the customer didn't necessarily know about or agree to.
Examples
- A platform that rehypothecates customer deposits may not actually hold those specific assets in reserve at the moment a customer tries to withdraw them.
- Rehypothecation is a documented contributing factor in several real crypto lending-platform failures, where customer assets turned out to already be lent out elsewhere.