https://www.forbes.com/sites/caitlinlong/2018/08/13/the-r-and-c-words-enter-the-vocabulary-of-bitcoin-enthusiasts/#38ff556868f3
Two Wall Street Terms Every Bitcoin Trader Needs To Learn Now
The “R” and “C” words, rehypothecation and commingling, are as antithetical to how Bitcoin works as they are integral to how Wall Street works. Many institutional investors simply cannot avoid these practices due to outdated regulations, such as the SEC’s custody rule and the requirement to use central clearing—though some, such as developer Christopher Allen’s #SmartCustody efforts—are trying to give institutions real alternatives, hoping to create impetus to change those outdated rules. The risks involved in rehypothecating and commingling bitcoin are very different than those of other financial assets.
But that’s not how CCPs work. Rehypothecation and commingling are major components of how CCPs make money—if they did neither, CCPs would need to charge clients a lot more money for the risks they assume. Plus, there are fat profit margins in rehypothecating collateral, especially for types of assets that are “hard to borrow” or trade “special.” Bitcoin is the epitome of “hard to borrow,” owing to its natural scarcity and because so many of the 17 million outstanding bitcoins are squirreled away in cold storage. It’s clear why CCPs want in.
But there’s more—the centralization of risk in the financial system is not just in CCPs—asset custodians also centralize risk, and they, too, commingle and rehypothecate. Owing to the SEC’s custody rule, most institutional investors use third-party asset custodians. ICE intends to become a crypto custodian as well, and Goldman Sachs may follow. More to come regarding institutional custody for crypto in a separate post.