Rehypothecation
When a company that holds your assets pledges them as collateral for its own borrowing. If it fails, they may not come back to you.
The word comes from finance. When a hedge fund posts securities with its broker as collateral, the broker can pledge them again to raise money for itself: that’s rehypothecation. A working paper published by the IMF in 2010 noted that prime brokerage agreements give blanket consent to it unless they say otherwise, and that clients who allow it pay less. US rules capped it at 140% of what the client owed the broker; British rules set no limit. When Lehman Brothers’ London arm went bankrupt in 2008, its administrators confirmed that some clients’ assets had been rehypothecated and were no longer held for them, so those clients joined its unsecured creditors.
Crypto lenders wrote the same right into their terms. Celsius’s terms gave it the right to “pledge, re-pledge, hypothecate, rehypothecate, sell, lend” the coins customers put in its Earn accounts, which paid interest, and warned that if it went bankrupt, those coins might not be recoverable. In January 2023, the judge in its bankruptcy ruled that the coins in those accounts, about 4.2 billion dollars in some 600,000 accounts, belonged to Celsius, not to its customers.
It matters because coins a company may pledge can end up backing its debts, and in a failure its lenders may get to them first. Before you deposit anywhere, look in the terms for words like pledge, hypothecate, rehypothecate or lend: if they’re there, you’re lending to the company, not storing with it. Coins in self-custody can’t be pledged by anyone but you. The guide on custodial and self-custody has the Celsius and BlockFi rulings, and counterparty risk is the name for what you take on.