Crypto lending risks: custody, rehypothecation and what happened when lenders failed

Crypto lending risks start with who controls the coins and what the agreement lets that party do with them. A borrower may send coins to a lender, a custodian or a multisignature address, and the contract decides whether the lender gets title, a security interest or permission to reuse the collateral. Rehypothecation means reusing collateral that was already pledged, including repledging it or lending it onward. If a lender fails, the customer may get the crypto back, hold a secured claim or hold only a general unsecured claim, depending on the contract, the custody setup and the bankruptcy ruling. FDIC insurance does not cover crypto assets (opens in a new tab), and SIPC protection is limited (opens in a new tab) and generally excludes digital assets that are not securities.

What the main crypto lending risks are

Custody and ownership of the pledged asset come first. After that come lender failure, reuse of collateral, liquidity limits, margin calls and liquidation, smart-contract or operational failures, fraud, uncertain regulatory status and missing deposit insurance. Enforcement over Celsius's Earn program (opens in a new tab), the missing FDIC coverage (opens in a new tab) and the limits of proof-of-reserves reports (opens in a new tab) each touch a different part of that list.

Some of these risks sit beside a real feature of the product. A loan lets a holder get cash without selling, and the pledged coins are what make that possible. The same pledge is what creates the custody question, because the coins have to sit somewhere, under someone's control, under some set of terms. How the pledged coins behave when the price falls belongs to the liquidation topic in the Bitcoin borrowing series; this page stays with custody and failure.

Who holds the pledged crypto

There are three common arrangements.

With lender custody, the borrower sends crypto to the lender or an affiliate. The agreement may give the lender title, a lien, control rights or permission to reuse the asset. Voyager's customer agreement is an example of broad reuse language, quoted below.

With a third-party custodian, the collateral sits with a separate custodian or in a trust structure. The terms to look for are the custodian's name, the legal owner of the coins, how they are kept apart from other customers' coins, any liens, what happens if a party becomes insolvent and how the collateral is released.

With multisignature custody, a transaction needs more than one key. Unchained publishes a 2-of-3 multisignature structure (opens in a new tab) with keys held by the borrower, Unchained and a third-party key agent, and its collateral is described as not rehypothecated. Unchained's Terms of Service (opens in a new tab), last updated July 30, 2026, say borrowers transfer Bitcoin as collateral and that a third-party key agent may hold a private key. Those statements describe Unchained's own arrangement, not multisignature loans in general.

A custody wallet can also carry restrictions on use. Under Coinbase's U.S. User Agreement (opens in a new tab), Coinbase will not sell, transfer, loan, hypothecate or otherwise alienate Supported Digital Assets in a Digital Asset Wallet, except for specified legal, customer-directed or product-specific circumstances. That is a wallet term, and it does not describe every lending or financing arrangement Coinbase offers.

What rehypothecation is, and how title differs from a security interest

Rehypothecation is the reuse of collateral already pledged to an intermediary (opens in a new tab). Depending on the contract, that can mean repledging the collateral to another lender, lending it to a third party, using it in financing, staking it or moving it under a title-transfer arrangement.

Title transfer and a security interest are different things. With a security interest, the borrower still owns the coins and the lender holds a claim against them until the loan is repaid. With title transfer, ownership passes to the lender, and the borrower is left with a contractual right to be paid or to get equivalent assets back. Which of the two applies is a question of contract language.

Voyager's customer agreement, as quoted in a court filing dated August 5, 2022 (opens in a new tab), read:

> "Customer grants Voyager the right, subject to applicable law, without further notice to Customer, to hold Cryptocurrency held in Customer's Account in Voyager's name or in another name, and to pledge, repledge, hypothecate, rehypothecate, sell, lend, stake, arrange for staking, or otherwise transfer or use any amount of such Cryptocurrency, separately or together with other property, with all attendant rights of ownership, and for any period of time and without retaining a like amount of Cryptocurrency, and to use or invest such Cryptocurrency at Customer's sole risk."

What can happen when the lender fails

In bankruptcy, the first question is whether the coins belong to the estate or to the customer. The answer depends on the contract, the custody structure, whether assets were segregated, the applicable property law and the court's rulings. A customer may end up with the crypto itself, a secured claim or a general unsecured claim, which is paid from whatever the estate can distribute to creditors of that rank.

Two court records show how that played out. In Celsius, the Bankruptcy Court held (opens in a new tab) that assets in Earn accounts were property of the estates and that Earn holders were unsecured creditors. In Voyager, the company contended that customers had only general unsecured claims (opens in a new tab) to cryptocurrency credited to their accounts, while certain cash deposits at Metropolitan Commercial Bank were treated separately. Neither record sets a rule for every lender, and each turned on that company's own terms.

Accounting rules do not settle ownership either. SEC Staff Accounting Bulletin 121 (opens in a new tab), issued March 31, 2022, required covered entities to record a safeguarding asset and a matching liability for customer crypto. SAB 122 (opens in a new tab), effective January 30, 2025, rescinded that guidance and sent entities to existing loss-contingency standards. How a company presents customer crypto on its books does not by itself decide who owns it in bankruptcy.

What happened at Celsius

Celsius filed Chapter 11 in the Southern District of New York, Case No. 22-10964, on July 13, 2022. In its January 4, 2023 Earn Opinion, the court relied on Terms of Use language giving Celsius "all right and title to such Digital Assets, including ownership rights," and treated the matter as contract interpretation. The title-transfer language appeared in Terms Version 5 and later versions (opens in a new tab), according to a September 12, 2023 court filing summarizing the opinion.

Regulators took action over how the program was run. Celsius ran its Earn Interest Program from about 2018 until the June 12, 2022 halt, taking crypto assets in exchange for interest payments, and the SEC charged Celsius and Alex Mashinsky (opens in a new tab) on July 13, 2023 with unregistered offerings, fraud, misleading statements and market manipulation. The FTC alleged (opens in a new tab) that Celsius took title to and misused more than $4 billion in consumer deposits, and made about $1.2 billion in unsecured loans as of April 2022. The settlement set a $4.7 billion judgment against the Celsius entities, suspended to allow bankruptcy distributions, and permanently barred the companies from handling consumer assets. These are allegations and a settlement, which is different from a court finding.

Celsius borrowers were in a separate position, because their collateral was governed by loan agreements and the plan. A Celsius plan filing (opens in a new tab) said excess collateral after a liquidation was generally to be returned to the borrower's Celsius Account. Some borrowers asserted wrongful-liquidation claims under their agreements and Article 9 of the Uniform Commercial Code; those claims were disputed and went through the plan and court process.

What happened at BlockFi

BlockFi's interest-bearing accounts and its loans were different products. On February 14, 2022, BlockFi Interest Accounts let investors lend crypto assets to BlockFi for variable monthly interest, and the SEC found in Release No. 2022-26 (opens in a new tab) that the accounts were unregistered securities and that BlockFi operated as an unregistered investment company. A false and misleading website statement about risk in its loan portfolio ran for more than two years, the SEC found. BlockFi agreed to a $50 million SEC penalty and to stop offering the product in the United States, and state settlements added another $50 million. BlockFi then filed Chapter 11 in the District of New Jersey, Case No. 22-19361-MBK.

Borrower collateral was handled under the loan agreement. One borrower agreement, described in an August 29, 2023 D.N.J. opinion (opens in a new tab), gave BlockFi a security interest in BTC collateral, allowed liquidation on three days' notice when the loan-to-value ratio (LTV, the loan balance as a share of collateral value) went above 70%, and allowed immediate liquidation above 80%. That case involved about 399 BTC sold after a margin call. In a February 8, 2024 opinion (opens in a new tab), the loan agreement permitted liquidation above 80% LTV, borrowers received notices when collateral was sold, and the disputed collateral claim went to the bankruptcy claims process. Those facts belong to the loans before the court, not to every BlockFi loan or every crypto-backed loan.

What happened at Voyager

Voyager Digital filed bankruptcy in the Southern District of New York, Case No. 22-10943. The reuse language quoted earlier comes from its customer agreement, and Voyager argued in the case that customers had only general unsecured creditor rights for their cryptocurrency.

On July 28, 2022, the FDIC and the Federal Reserve sent a joint letter (opens in a new tab) and release (opens in a new tab) demanding that Voyager stop statements implying that Voyager itself was FDIC insured, that all customer funds were insured, or that FDIC insurance covered Voyager's failure. Voyager kept a customer deposit account at Metropolitan Commercial Bank, but Voyager was not an FDIC-insured institution.

Later failures and state enforcement

Genesis Global Capital filed Chapter 11 in the Southern District of New York on January 19, 2023. Genesis and Gemini ran the Gemini Earn program, in which customers lent crypto to Genesis for interest, and Genesis halted withdrawals in November 2022 without enough liquid assets to meet requests, according to the SEC's March 19, 2024 settlement (opens in a new tab). Genesis then held about $900 million in crypto from about 340,000 Earn investors. The SEC settlement carried a $21 million civil penalty, payable only after allowed bankruptcy claims, including Gemini Earn claims.

The New York Attorney General announced on June 14, 2024 (opens in a new tab) that Gemini agreed to return about $50 million in crypto assets to Earn investors and was banned from running cryptocurrency lending programs in New York. A New York Department of Financial Services settlement announced in February 2024 required Gemini to contribute at least $40 million for Earn users and pay a $37 million penalty. The SEC's enforcement list (opens in a new tab) also includes SEC v. Plutus Lending, LLC, doing business as Abra, filed August 26, 2024.

Does FDIC or SIPC insurance apply

FDIC insurance applies to deposits at an FDIC-insured bank (opens in a new tab) and protects against that bank's failure. FDIC insurance does not apply to crypto assets and does not protect against the bankruptcy of crypto custodians, exchanges, brokers, wallet providers or neobanks (opens in a new tab) (FDIC fact sheet, July 28, 2022). A bank deposit that sits behind a crypto company is a different thing from the crypto company's own products, so the useful question is which insured bank holds which deposit, in whose name.

Digital asset securities that are unregistered investment contracts do not qualify as protected securities (opens in a new tab) under the Securities Investor Protection Act, and SIPC protection does not reach digital or crypto assets that are not securities, losses from investment performance or ordinary futures-account losses. Representing or implying that an uninsured product is insured is prohibited by the Federal Deposit Insurance Act, and 12 CFR Part 328, Subpart B (opens in a new tab) contains the FDIC rules on misrepresenting deposit insurance status.

Does proof of reserves show a lender can pay its customers

Proof of reserves is generally a report or agreed-upon procedure meant to show specified crypto assets held by an entity at one point in time. These engagements are not audits (opens in a new tab), the PCAOB Office of the Investor Advocate warned on March 8, 2023. The procedures may leave out the entity's liabilities, the rights and obligations of digital-asset holders, whether assets were borrowed to look like sufficient reserves, whether reserves will stay adequate, whether customer assets are protected and whether the entity is financially stable.

A reserve figure therefore cannot, alone, show solvency, liquidity, legal ownership, segregation, an absence of liens or rehypothecation, or recovery in bankruptcy.

Questions to ask before transferring crypto

These questions can go to a lender in writing, and the answers belong in the signed agreement or in records the lender provides.

• Which legal entity receives the crypto?
• Does the agreement transfer title or create a security interest?
• Who controls each private key?
• Is the collateral kept separately for each customer, pooled or held in a trust?
• May the lender sell, lend, stake, repledge, rehypothecate or invest it, and may a funding partner or affiliate receive it?
• What notice applies before a liquidation, and what happens to excess collateral afterward?
• What records show the quantity and location of the collateral?
• Is any claimed insurance FDIC deposit insurance, and which insured bank holds the deposit?
• Does SIPC apply to this asset and this registered broker-dealer?
• Does a proof-of-reserves report cover liabilities and encumbrances?
• What happens to the collateral if the lender, the custodian or a funding partner files for bankruptcy?
• Which regulator licenses or supervises each entity, and where do complaints go?

The SEC focuses on disclosure and registration for crypto lending products, the FDIC and Federal Reserve on accurate insurance statements, and the PCAOB on what proof-of-reserves reports omit. State regulators may add licensing, securities, lending, money-transmission or consumer-protection rules. A lawyer or an accountant can read the actual custody and loan agreements. Inversado's financial professionals directory lists financial planners, investment firms and stock brokers by city, and a firm's registration can be looked up on FINRA BrokerCheck (opens in a new tab) and the SEC's Investment Adviser Public Disclosure search (opens in a new tab).

Frequently asked questions

What is rehypothecation?

Rehypothecation is an intermediary's reuse of collateral that a customer already pledged. It can include repledging the collateral to another lender or lending it to a third party. Whether it is allowed depends on the lender's agreement.

Who owns crypto pledged for a loan?

The agreement may transfer title to the lender or create only a security interest. The contract and the applicable law control, so the wording of the pledge and custody terms matters more than the word "collateral."

Are crypto-backed loans FDIC insured?

No. FDIC insurance does not cover crypto assets or the failure of a nonbank crypto lender. It covers deposits at an insured bank when that bank fails.

Can a lender liquidate collateral?

Loan agreements commonly authorize liquidation after specified collateral or loan-to-value events. Notice and timing depend on the agreement, as the BlockFi thresholds above show.

Where to go next

The Bitcoin borrowing series lays out how Bitcoin-backed loans work, liquidation, taxes, DeFi versus centralized loans and what to check before using a lender. The signed custody and loan agreements are where title, reuse and bankruptcy terms are confirmed, and a lawyer or accountant can read them with the borrower.