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"Forbes contributor and Wall Street veteran Caitlin Long has written a detailed explanation on this topic in a column. According to Long, rehypothecation and commingling will centralize risks associated with bitcoin and cryptocurrencies to exchanges, clearinghouses, and central derivatives counterparties. Centralized risk translates to greater vulnerability because this would offer hackers a single point-of-attack to cripple the cryptocurrency ecosystem."

"At the risk of getting into trouble with my boss, who hates jargon like this, one of Celsius's uses of your crypto is to "rehypothecate" it. For those who weren't around for the global financial crisis and don't know that word, hypothecate means party A pledges an asset to party B as collateral to secure a loan. Rehypothecate means party B then takes party A's collateral and pledges it to party C, who passes it to party D and so on. The risk is if one of these parties runs into trouble, then the whole alphabet is in danger."

Coinbase will allow U.S. retail customers to borrow fiat loans against as much as 30% of their bitcoin holdings in the fall. Credit lines will be capped at $20,000 per customer and an interest rate of 8% will be pffered for bitcoin-backed loans with terms that are a year or less. The exchange says it won't reinvest the collateral elsewhere and will keep the bitcoin at the exchange, unlike some crypto lenders who rehypothecate collateral or invests deposits into perpetual swaps. The new Coinbase product is only available in the following states: Alaska, Arkansas, Connecticut, Florida, Georgia, Illinois, Massachusetts, New Hampshire, New Jersey, North Carolina, Oregon, Texas, Virginia, Nebraska, Utah, Wisconsin and Wyoming. https://www.coinbase.com/borrow

The market reactions over the past week are a reminder that stablecoins are far from homogenous and carry different reserve profiles with varying risk, not unlike banks in traditional finance. The crypto markets are still assessing the aftermath of the UST collapse but one immediate effect has been a drawdown in stablecoin liquidity within DeFi. The amount of USDC held in smart contracts on Ethereum has fallen by about $5B since its peak in March. Similarly, the supply of DAI (an over-collateralized, crypto-backed stablecoin) in smart contracts has also fallen about $2B. Most of this decline can be attributed to weakening demand for DAI on decentralized exchanges, cross-blockchain bridges, and lending protocols. Estimates of total value locked (TVL) have also come down, but these measures are often exaggerated due to rehypothecation of assets.

Lending and borrowing cryptocurrencies is becoming an increasingly important sub-sector of crypto finance, one that may end up shaping how the underlying assets themselves are valued and priced in the markets.

As the ECB noted in a recent stablecoin research piece in an extreme-case scenario where libra coins prove as popular as Facebook, the global size of the Libra Reserve could reach almost €3tn of assets under management! In that context it's fair to say the Libra Reserve's potentially endless demand for safe assets could swiftly transform it into a self-consuming Ouroboros. Especially in the current crisis environment.

"In the IMF working paper, called Privacy provision, payment latency and role of collateral, authors Charles Kahn, Caitlin Long and Manmohan Singh argue that digital currencies are analogous to collateral reuse, where securities are exchanged for cash. Looked at this way, central bank digital currencies (CBDCs) and commercial-bank sponsored tokens may be preferable to stablecoins, such as libra, which are issued by private companies without bank charters. "