Rehypothecation

Rehypothecation is when a platform reuses assets you've pledged as collateral for its own purposes, like lending them out or posting them as collateral elsewhere. It matters because it multiplies risk quietly: if the platform's other bets go bad, the assets backing your position can vanish even though you never sold anything. In crypto, this became infamous with Celsius and BlockFi, which took customer deposits meant as collateral and lent them to firms like Three Arrows Capital. When Three Arrows collapsed in 2022, that rehypothecated collateral was gone, leaving customers as unsecured creditors instead of holders of a segregated asset. Traditional finance has rules limiting how much collateral can be reused; many crypto lenders didn't disclose the practice at all before it broke.