What is Rehypothecation?
Let's find out Rehypothecation meaning, definition in crypto, what is Rehypothecation, and all other detailed facts.
Rehypothecation is the practice where financial institutions that provide collateral services, such as banks or brokerage firms, take the assets placed by the clients under their care as collateral and use them for their own benefits. If the clients allow rehypothecation to be done using their assets, they may be eligible for compensation.
In order to understand the process of rehypothecation, you must also be aware of hypothecation. This is a financial process that occurs during lending when a borrower promises the rights to certain assets to be used as collateral. In exchange, they can receive funds.
Hypothecation is particularly common in the housing market. Borrowers can receive a mortgage loan by putting forward the house they are purchasing as collateral. Hypothecation ensures that if the borrower fails to make payments, the lender will be eligible to seize the asset and take over the ownership.
Lenders can lead to rehypothecation if they take the assets placed by a client as collateral in exchange for a guarantee of the right to an asset. The clients may be reimbursed by receiving lower borrowing costs or have to pay reduced fees for financial services. This practice was commonplace up until the mid-late 2000s.
Banks or brokers can take the securities placed as deposits in margin accounts to be used for their own purposes, like backing a loan. This helps brokers generate more credit from the securities, which leads to the same asset being used to collateralize several different financial operations.
The practice of rehypothecation can inject liquidity into the market and increase access to capital.
Rehypothecation has been perceived negatively in the crypto space. It is believed that rehypothecation can cause destabilization and negatively impact the prices of Bitcoin (BTC).