Definition ∞ Asset rehypothecation occurs when a financial institution reuses client assets that were provided as collateral for its own transactions. This practice permits a broker to lend out client securities to other parties, often for short selling or to collateralize its own borrowings. Such reusage multiplies the risk exposure of the original assets, as multiple claims may exist against the same underlying holdings. It is a process that can increase market liquidity but simultaneously introduces additional counterparty risk.
Context ∞ The practice of asset rehypothecation in traditional finance has seen scrutiny, and its potential application or parallels within digital asset lending platforms raises concerns regarding user fund security and transparency. Understanding the implications of rehypothecation is vital for evaluating the risk profiles of various decentralized finance protocols and custodial services. Regulatory bodies globally are examining how existing financial principles, including those concerning asset segregation, apply to the digital asset space.
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