When you hand over your crypto to a lender, what happens to it next? That single decision can determine whether your assets are safe—or unknowingly used to prop up someone else’s loan. This practice is called rehypothecation, and it’s one of the most under-explained, high-risk areas in crypto lending.
This guide explains what rehypothecation is, why it matters, and how it affects lenders, borrowers, and the wider crypto ecosystem. It also shows how Vield’s model avoids these risks by using a custodial, non-rehypothecated approach.
What Is Crypto Rehypothecation?
Rehypothecation is when a lender takes your collateral (in this case, your crypto) and reuses it—usually as collateral for their own loans or to fund additional lending to other borrowers.
This practice is common in traditional finance (TradFi), especially in prime brokerage. In crypto, it’s far riskier. Your deposited Bitcoin might be lent to another borrower, used to chase yield in DeFi, or placed in risky strategies—all without your direct knowledge or consent.
In simple terms: you pledge your assets, and the lender uses them again elsewhere.
Why It Matters in Crypto Lending
Crypto markets don’t have the same regulatory oversight or insurance protections that exist in TradFi. If a lender fails, there’s often no clear path for recovering your assets—especially if they’ve been co-mingled or rehypothecated across multiple platforms.
Several major collapses in recent crypto history—BlockFi, Celsius, Voyager—were tied to excessive rehypothecation and poor risk management. In those cases, clients thought they were just lending to the platform. In reality, their assets had been lent multiple times over, and were unrecoverable when things fell apart.
Risks of Crypto Rehypothecation
1. Counterparty Risk Amplification
Your risk exposure isn’t limited to the lending platform. If your crypto is rehypothecated, you’re indirectly exposed to the second borrower, or the strategy that uses your assets.
2. Co-mingling of Funds
Rehypothecation often involves pooling customer assets together. This makes it harder to trace ownership and harder to recover specific coins if the platform fails.
3. Loss of Control and Visibility
Once your assets are reused, you no longer have a clear view of where they are or how they’re being used. This makes it impossible to accurately assess risk.
4. Tax Implications
In some jurisdictions, especially Australia, lending crypto that is then re-used may trigger a Capital Gains Tax (CGT) event. This is because the platform may have effectively disposed of your asset in a legal sense, even though you didn’t sell it yourself.
5. No Guarantee of Return
In the event of default, recovery becomes complex. With multiple rehypothecation layers, you may be several steps removed from your actual collateral, making it unlikely to be returned in full.
Why Many Lenders Still Rehypothecate
Platforms often rehypothecate to increase their profit margins. By lending out your collateral or using it for yield strategies, they’re able to generate extra return on capital—at your risk, not theirs.
It also helps them meet liquidity demands from other borrowers quickly without holding significant reserves. In short: they use your assets to fund their business operations.
Unfortunately, most retail users don’t realise this is happening.
The Vield Model: We Do Not Rehypothecate
Vield takes a different approach. It offers custodial crypto-backed loans—but does not rehypothecate customer collateral.
Here’s how it works:
- You deposit your Bitcoin or Ethereum into a segregated escrow account, not a pooled wallet.
- Your crypto stays in secure custody which you are able to verify it on the blockchain
- Vield issues you a credit line (loan or credit card) against that asset, but does not use the crypto again.
- Your assets remain untouched for the term of the loan unless your loan is in default.
This structure offers transparency and security. You know where your assets are. You know they’re not being lent to other borrowers. And you retain the upside of your crypto appreciating.
Real Scenario: How This Protects the Borrower
Consider a recent borrower named Jason. He deposits $20,000 worth of Bitcoin to receive a $10,000 loan through Vield.
Because Vield doesn’t rehypothecate:
- His BTC stays in cold storage with Zodia Custody.
- If Bitcoin goes up 50%, his collateral now sits at $30,000. He still retains the economic upside.
- If Bitcoin drops, he’s notified and may be asked to top up collateral or repay part of the loan—but he never risks losing his assets to another borrower’s default.
Contrast that with a rehypothecating lender. Jason’s BTC might be used to fund a DeFi yield strategy. If that strategy fails, his collateral could be wiped out—even if he never missed a payment.
The Case for No-Rehypothecation Lending
If you’re borrowing against your crypto, it’s not unreasonable to expect that your assets stay where you left them. Rehypothecation introduces unnecessary complexity and misaligns incentives between you and the lender.
A no-rehypothecation model like Vield’s offers:
- Transparency – You always know where your assets are.
- Security – Custodial cold storage and independent audits.
- Control – No double-lending, no co-mingling.
- Tax clarity – Reduced chance of CGT events triggered by third-party disposal.
In an industry still building trust, that clarity matters.
Non-rehypothecation Lending with Vield
Rehypothecation isn’t just a technical term—it’s a structural risk. It puts your crypto in places you never agreed to. And when markets turn volatile, you’re the one left holding the losses.
For anyone considering a crypto loan or credit product, ask the right question:
Is my crypto being rehypothecated?
If the answer is unclear, avoided, or if you are unable to verify it yourself, that’s your answer.
Lenders like Vield are proving that it’s possible to offer crypto-backed lending without gambling with your assets. And in an industry where trust is still catching up to technology, that’s a safer way forward.
Don’t trust, verify.
