Rehypothecation

Rehypothecation is the practice of a financial institution reusing collateral that clients have pledged to it, posting the same assets to secure its own borrowing. United States rules cap the amount a broker may rehypothecate at 140 percent of a client's debit balance, while the United Kingdom historically imposed no such limit, which drew leveraged business to London.

Why it matters

Rehypothecation multiplies both liquidity and fragility. A single bond or share can support several layers of borrowing as it passes through collateral chains, so the same asset backs multiple obligations at once. When Lehman Brothers failed in 2008, hedge fund clients of its London unit discovered their rehypothecated assets were tangled in the bankruptcy, converting what they thought was custody into an unsecured claim. Collateral chains contracted across the system, amplifying the crisis.

In the gold vs bitcoin debate

Both asset communities treat rehypothecation as the disease their asset is meant to cure. Gold critics point to unallocated bullion accounts, where clients hold claims on a pool rather than specific bars, as a system in which paper claims can exceed metal. Bitcoiners repeat the phrase not your keys, not your coins for the same reason, and the 2022 failures of Celsius and FTX showed customer coins being reused exactly as the warning predicted. Held in personal custody, physical gold and self-custodied bitcoin are among the few financial assets that cannot be rehypothecated by anyone.