Definition ∞ Rehypothecation failure occurs when an institution reuses client assets as collateral for its own borrowings, and then cannot return those assets. This situation arises when a financial entity, having legally or contractually repledged client-owned securities or digital assets, experiences an inability to retrieve or deliver them upon the client’s request. Such failures often stem from liquidity issues, excessive leverage, or the insolvency of the rehypothecating institution. It exposes clients to substantial counterparty risk and asset loss.
Context ∞ Rehypothecation failure has been a critical issue in recent digital asset market events, contributing to significant losses for users of centralized lending and exchange platforms. News reports frequently detail the dangers of platforms engaging in such practices without adequate transparency or safeguards. Regulators are increasingly scrutinizing these activities, seeking to impose stricter rules to protect client assets and prevent systemic risks within the crypto financial system.
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