Definition ∞ Asset re-hypothecation is when a financial institution reuses a client’s collateral for its own borrowing or trading activities. This practice permits the institution to lend out assets that clients have pledged as security for loans or other transactions. It effectively multiplies the utility of the original collateral within the financial system.
Context ∞ In traditional finance, asset re-hypothecation introduces systemic risk by increasing interconnectedness among financial entities. Within digital asset markets, concerns arise regarding the potential for similar practices by centralized crypto lenders or exchanges. Debates address whether such actions introduce hidden leverage and counterparty risk, particularly during market volatility.
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