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'Rehypothecation': More about the Wall Street Practice that Could Ruin Bitcoin


The Problem with Clearing

Beyond costs to the issuers themselves, this system has resulted in a huge rise in brokerage costs with over $100 billion in post-trade servicing fees every tear. Finally, there's the issue of ownership, something that should be hugely familiar to cryptocurrency enthusiasts who chant the mantra, "If you don't own your private key, you don't own your bitcoins." This is familiar thanks to the oh-so-painful experiences of millions of bitcoin being stolen over the course of 30+ hacks. It turns out that shareholders don't own their stocks either, with the DTCC owning 99 percent of shares. Instead what most people own and trade are "security entitlements" or the "rights and property interest of an entitlement holder with respect to a financial asset." Shares traded today are not securities, but entitlements to underlying securities. These shares also go through a complex settlement system through the "National Securities Clearing Corporation," yet another DTCC subsidiary. The process is outlined in the graphic below but basically consists of debiting and crediting accounts inside the DTCC. It is notable that the process is different within the new Direct Registration System (DRS), but not in a significant way for the purposes of this article.

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