Arch Lending CTO: qualified custody, no rehypothecation and clear collateral rules are essential for safe Bitcoin-backed loans Himanshu Sahay, co‑founder and CTO of Bitcoin-backed lender Arch Lending, says three concrete safeguards can materially reduce the risks that have dogged crypto lending: qualified custody, a strict no‑rehypothecation policy, and transparent collateral rules. Speaking with crypto.news, Sahay argued that as wealthy Bitcoin holders increasingly tap loans for liquidity, those protections should be standard — not optional. Why Bitcoin loans are growing — and why they’re risky - Borrowing against Bitcoin lets long‑term holders access cash without selling and realizing capital gains. Individuals may spend proceeds or redeploy them into other investments; family offices and businesses often use loans for working capital. - That said, borrowing isn’t risk‑free. Interest increases repayment costs, and price declines can push loan‑to‑value (LTV) ratios up, triggering margin calls and potential liquidations. “Borrowing is not risk‑free. It comes with interest costs, margin‑call risk, and potential liquidation if the value of the collateral falls,” Sahay said. Tax and reporting considerations - In the U.S., selling appreciated Bitcoin typically creates a capital gain or loss that must be reported. Using Bitcoin as collateral does not itself trigger a sale, but if a lender liquidates collateral, tax consequences can follow. The IRS recommends investors consult tax professionals to determine reporting obligations. Custody is the foundation - Sahay says custody — who controls the private keys — is the single most important element in a well‑structured Bitcoin‑backed loan. Poor custody practices can lead to unauthorized transfers, commingling of assets, or confusion about where collateral sits. - Arch uses Anchorage Digital Bank, a federally chartered U.S. bank and qualified custodian, to hold borrower collateral. “Arch Lending does not hold the private keys, and borrower collateral is not rehypothecated,” Sahay said. - Anchorage won a national trust bank charter from the OCC in January 2021 and was approved to perform fiduciary and custodial activities under capital, liquidity and risk‑management requirements. The OCC later issued a consent order in April 2022 after finding gaps in Anchorage’s Bank Secrecy Act/anti‑money‑laundering compliance; Anchorage was directed to strengthen due diligence, suspicious‑activity monitoring, and independent testing. No rehypothecation prevents a different class of risk - Rehypothecation is when a lender or custodian reuses pledged collateral in other loans, trades or investments. Arch’s no‑rehypothecation policy means borrower Bitcoin can’t be deployed elsewhere while it secures the loan. - Sahay warns that rehypothecation exposes borrowers to extra counterparties: if the receiving party freezes withdrawals or defaults, the original lender may be unable to return the collateral even when the borrower has met obligations. How typical loans work — LTVs, margin calls and insurance - Arch’s product page lists initial Bitcoin LTVs up to 60%. Borrowers receive warnings and margin calls as LTV rises; partial liquidation is used where necessary to restore required levels. Exact thresholds depend on the loan product and agreement. - Anchorage holds collateral in individually segregated wallets and Arch says it neither lends, stakes nor trades pledged assets. The company cites up to $100 million in insurance via Anchorage, but that coverage applies to specific custody and operational incidents — not market losses from Bitcoin price declines or contractually permitted liquidations. Industry lessons from past failures - The collapses of Celsius, BlockFi and Genesis highlighted the dangers of mixing custody, lending and asset deployment without clear disclosures. According to Sahay, many failed lenders combined those activities in opaque ways that left customers uncertain where their collateral was or how it was being used. - Regulators and litigators took action: the FTC alleged Celsius took title to over $4 billion in customer deposits and used assets to fund risky investments despite claiming deposits were safe; BlockFi paid $100 million in settlements with the SEC and states and later entered bankruptcy; Genesis suspended withdrawals in November 2022 and reached multibillion‑dollar settlements for affected customers. Alternative custody constructions - Some market participants are exploring multi‑signature and independent‑signatory structures to prevent rehypothecation. A recent report described a Sygnum/Debifi design where collateral moves require approval from multiple signatories, including the borrower, the bank and independent parties. What borrowers should ask before taking a Bitcoin loan Sahay recommends examining multiple aspects of a lending agreement rather than relying on a single promise. Key questions include: - Who holds the Bitcoin and who controls the private keys? - Is rehypothecation allowed? - How does the lender fund loans and where do counterparty risks lie? - What are the LTV thresholds, warning triggers and liquidation mechanics? - What happens to collateral if the lender faces financial distress or bankruptcy? Bottom line Qualified custody and a strict no‑rehypothecation policy address different — but complementary — risks: custody governs who can authorize transfers, while contract language determines whether the lender may reuse collateral. Together with clear LTV rules, active monitoring and transparent disclosures, those safeguards can make Bitcoin‑backed lending a far safer tool for investors seeking liquidity without selling their holdings. Read more AI-generated news on: undefined/news