Rehypothecation is a process where brokers use the assets collateralized by clients for their own benefit.
What Is Rehypothecation?
Rehypothecation is a way of generating credit from assets and allowing multiple financial transactions to be collateralized by the same asset. To understand rehypothecation, one must understand what hypothecation is.
Hypothecation is the process of pledging assets as collateral for a debt. This is a common practice in lending. In the case of rehypothecation, it is a process of using hypothecated collateral as an asset in itself and offering that as collateral when seeking a loan.
In the digital economy, rehypothecation has been said to destabilize the crypto space, suppress BTC prices and reduce the efficacy of blockchain security by taking claims to ownership off-chain that have not materialized. Bitcoin has more than tripled in value since 2018, suggesting price-suppression effects have been minimal.
Author:
Gunnar Jaerv is the chief operating officer of First Digital Trust — Hong Kong’s technology-driven financial institution powering the digital asset industry and servicing financial technology innovators. Prior to joining First Digital Trust, Gunnar founded several tech startups, including Hong Kong-based Peak Digital and Elements Global Enterprises in Singapore.