Himanshu Sahay, CTO and co‑founder of Bitcoin-backed lender Arch Lending, warns that three changes are essential to make crypto loans safer: qualified custody, a strict no‑rehypothecation policy, and transparent collateral rules. In an interview with crypto.news he argued these guardrails reduce operational and counterparty risk for borrowers who want cash without selling their Bitcoin. Why wealthy holders are borrowing - Long‑term Bitcoin holders increasingly use loans to access liquidity while keeping their exposure. Borrowers—individuals, family offices and businesses—may use proceeds for investments, working capital or personal needs. - Borrowing avoids an immediate taxable sale for many U.S. investors, though tax treatment can change if lenders liquidate collateral. The IRS treats digital assets as capital assets and recommends consulting a tax professional about reporting obligations. Borrowing is useful — but risky Sahay emphasized borrowing isn’t risk‑free. Interest raises the amount to repay, and falling Bitcoin prices can push the loan‑to‑value (LTV) metric higher until margin calls or liquidations occur. Under typical Bitcoin‑backed loans, lenders compare outstanding debt to the current value of pledged Bitcoin; if the collateral drops below agreed thresholds, borrowers may have to add assets or face partial/full liquidation. Industry voices echo the need for conservative risk controls. Artem Ponomarev, CEO of XPlace, called for lower LTV caps, continuous collateral monitoring and clear liquidation terms so borrowers understand what happens if collateral loses value. Custody: the foundation of safe loans Sahay described custody as the structural foundation of a properly designed Bitcoin loan: custody determines who controls private keys and what can be done with collateral during the loan term. Arch keeps borrower collateral with Anchorage Digital Bank, a federally chartered U.S. trust bank that acts as a qualified custodian. Arch says it does not hold the private keys, and collateral is not rehypothecated. Context on Anchorage: - The Office of the Comptroller of the Currency granted Anchorage a national trust bank charter in January 2021, enabling it to offer fiduciary, agency and custodial services under capital, liquidity and risk‑management conditions. - Regulators have pushed Anchorage to improve compliance. In April 2022 the OCC issued a consent order requiring Anchorage to strengthen Bank Secrecy Act/AML programs and customer due diligence. What qualified custody does — and doesn’t — do Qualified custody helps reduce operational risks such as poor private‑key management, unauthorized transfers and commingling of borrower assets. But custody alone can’t stop market losses or prevent contractually permitted liquidations once LTV triggers are breached. Arch’s approach and limits - Anchorage holds collateral in individually segregated wallets, Arch does not lend, stake or trade pledged assets, and the custody arrangement includes advertised insurance coverage up to $100 million. (Insurance covers specified custody/operational events, not price declines or contractually allowed liquidations.) - Arch’s website lists initial Bitcoin LTVs up to 60%, with borrower warnings, margin calls and partial liquidations designed to restore required LTV levels. Exact thresholds vary by product and agreement. Rehypothecation: why “no” matters Rehypothecation is when lenders or custodians reuse pledged collateral for other loans, trades or investments. Sahay says a no‑rehypothecation policy prevents a borrower’s Bitcoin from being deployed elsewhere while securing the original loan, avoiding exposure to additional counterparties. If collateral is rehypothecated and the recipient defaults or freezes withdrawals, the original lender might be unable to return assets even if the borrower has met obligations. Alternatives like multi‑signature custody have been proposed to prevent rehypothecation. One product from Sygnum and Debifi used a 3‑of‑5 signatory wallet that included the borrower, the bank and independent parties so transfers required joint approval. What borrowers should ask Sahay urged borrowers to examine multiple elements of any lending contract rather than rely on a single safeguard. Key questions: - Who holds the Bitcoin and controls the private keys? - Is rehypothecation permitted? - How does the lender fund loans? - What LTV thresholds and margin‑call rules apply? - What are the terms if the lender or borrower becomes financially distressed? Lessons from 2022 and regulatory fallout Sahay pointed to the collapses of Celsius, BlockFi and Genesis as cautionary examples where custody, lending and asset deployment were intertwined and disclosures were unclear: - The FTC alleged in July 2023 that Celsius took title to more than $4 billion in customer deposits and used customer assets for operations and risky investments despite assurances to customers. - The SEC charged BlockFi in February 2022 for failing to register retail interest accounts and for misleading statements about collateral backing institutional loans; BlockFi later agreed to pay $100 million to the SEC and 32 states and filed for bankruptcy in November 2022. - Genesis suspended withdrawals in November 2022, filed for Chapter 11 in January 2023, and in May 2024 the New York attorney general secured a $2 billion settlement and barred Genesis from operating in the state. The NYAG said at least 29,000 New Yorkers had placed more than $1.1 billion into the Gemini Earn program tied to Genesis. Bottom line Qualified custody, clear collateral rules and a strict no‑rehypothecation policy can’t eliminate market risk, but they materially reduce operational and counterparty exposure for Bitcoin‑backed loans. Sahay’s message: lenders and borrowers alike must prioritize custody structure, contractual clarity and conservative risk controls — and do their homework before locking in a loan. Read more AI-generated news on: undefined/news