Understanding Rehypothecation
Rehypothecation is a practice that involves using assets pledged as collateral for a debt to generate credit and allow multiple financial transactions to be collateralized by the same asset.
To comprehend rehypothecation, it is essential first to understand hypothecation.
Rehypothecation Example | Source: Tokenist
Hypothecation is the process of pledging assets as collateral for a debt, which is a common practice in lending.
In the case of rehypothecation, the hypothecated collateral is used as an asset and offered as collateral when seeking a loan.
Boosting Liquidity
Rehypothecation is often employed when the broker-custodian initially lent the principal money to purchase the assets.
This practice helps create liquidity for individual market participants and across the market, increasing business access to capital and providing social benefits.
Debates and Impact on Bitcoin
In the context of the digital economy, rehypothecation has been criticized for potentially destabilizing the crypto space, suppressing Bitcoin (BTC) prices, and reducing the effectiveness of blockchain security by moving claims to ownership off-chain that may not have materialized.
However, it is worth noting that Bitcoin has experienced significant price growth since 2018, indicating that any price-suppression effects have been minimal.