Rehypothecation involves a financial institution using client assets, initially provided as collateral for a loan or other transaction, for its own purposes. In the context of digital assets, this means a platform might use deposited cryptocurrencies as collateral for its own borrowing or lending activities. This practice introduces additional layers of risk for the original asset owner.
Context
The practice of rehypothecation has become a contentious issue in the digital asset space, particularly after the collapses of several centralized platforms that engaged in such activities without full transparency. News reports frequently highlight the risks to users when their assets are rehypothecated, especially during market downturns. Regulatory efforts increasingly focus on prohibiting or severely restricting this practice to protect client funds.
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