Arch Lending co-founder Himanshu Sahay has identified qualified custody, zero rehypothecation, and clear collateral rules as three safeguards needed to reduce risks in Bitcoin-backed lending.
Summary
- Bitcoin-backed loans give long-term holders access to cash without requiring an immediate sale.
- Sahay said independent custody and zero rehypothecation can limit operational and counterparty risks.
- Borrowers still face interest charges, margin calls and liquidation when Bitcoin’s price falls.
- Celsius, BlockFi, and Genesis showed how opaque lending structures can leave customers exposed.
Himanshu Sahay, co-founder and chief technology officer of Bitcoin-backed lending platform Arch Lending, told crypto.news that wealthy Bitcoin holders are increasingly using loans to meet cash needs while keeping their exposure to the asset.
“For long-term Bitcoin holders, borrowing can provide liquidity without requiring them to sell their position,” Sahay said.
Individuals may use the proceeds for another investment or personal expenses, while family offices and businesses can borrow for working capital, according to Sahay. The arrangement allows the borrower to retain ownership of their Bitcoin unless the loan terms trigger a collateral sale.
A recent report on lending found that demand for Bitcoin-backed credit has recovered as investors look for liquidity without selling their holdings. The report said lending platforms have responded to the failures of 2022 by adopting clearer custody arrangements, plainer disclosures and more conservative risk controls.
Bitcoin-backed loans provide cash without an immediate sale
For US investors, selling appreciated Bitcoin generally requires the holder to calculate a capital gain or loss. The Internal Revenue Service treats digital assets held for investment as capital assets and requires taxpayers to report gains or losses when they sell or otherwise dispose of them.
Using Bitcoin as loan collateral does not involve the same immediate sale. Tax treatment can change, however, if the lender liquidates some or all of the collateral, while individual circumstances may create other reporting issues. The IRS advises digital-asset investors to consult a qualified tax professional when determining how a transaction should be reported.
Sahay did not present borrowing as a way to remove financial risk. Interest costs increase the amount that must be repaid, while a drop in Bitcoin’s price can raise the loan-to-value ratio, or LTV, until the borrower faces a margin call.
“Borrowing is not risk-free. It comes with interest costs, margin-call risk, and potential liquidation if the value of the collateral falls.”
Under a typical Bitcoin-backed loan, the LTV compares the outstanding debt with the current value of the pledged Bitcoin. If the asset declines enough, the borrower may need to add collateral or repay part of the loan. Failure to meet the lender’s requirements can lead to the sale of some or all of the Bitcoin.
Artem Ponomarev, founder and CEO of XPlace, made a similar case in an Aug. 18 interview, calling for safer borrowing tools built around conservative LTV limits, continuous collateral monitoring and clear liquidation terms. Ponomarev said borrowers should understand what will happen if their collateral loses value before taking out a loan.
Qualified custody separates collateral from the lender
Sahay described custody as the foundation of a properly structured Bitcoin-backed loan because it determines who controls the private keys and what can happen to the collateral during the loan term.
“At Arch Lending, collateral is held with Anchorage Digital Bank, a federally chartered U.S. bank and qualified custodian,” Sahay said. “Arch Lending does not hold the private keys, and borrower collateral is not rehypothecated.”
The Office of the Comptroller of the Currency granted Anchorage Digital Bank a national trust bank charter in January 2021. According to the OCC, Anchorage received approval to perform fiduciary, agency, and custodial activities after agreeing to capital, liquidity, and risk-management requirements under an operating agreement.
Federal oversight has not placed Anchorage beyond regulatory action. In April 2022, the OCC issued a consent order after finding that the bank had failed to adopt and implement a compliance program that met Bank Secrecy Act and anti-money-laundering requirements. The regulator required Anchorage to appoint a compliance committee and improve its customer due diligence, suspicious-activity monitoring, and independent testing.
Qualified custody is intended to place the assets with an institution that operates under defined regulatory and control requirements. Sahay said the arrangement can reduce operational risks involving private-key management, unauthorized transfers, and the separation of borrower assets.
Custody does not protect a borrower from a falling Bitcoin price, according to Sahay. It also does not prevent a liquidation carried out under the loan agreement after the collateral crosses a specified LTV level.
According to Arch’s website, Anchorage holds collateral in individually segregated wallets, while Arch does not lend, stake, or trade the pledged assets. The company also advertises up to $100 million in insurance coverage through Anchorage, although such insurance applies to specified custody and operational events rather than losses caused by Bitcoin price declines or contractually permitted liquidations.
Arch’s website lists initial Bitcoin LTV ratios of up to 60%. It says borrowers receive warnings and margin calls as the ratio rises, with partial liquidation available to restore the loan to its required level. Exact thresholds and terms can vary by product and loan agreement.
No rehypothecation limits connected lending risks
Rehypothecation occurs when a lender or custodian reuses pledged collateral in another loan, trade or investment. Sahay said a no-rehypothecation policy prevents a borrower’s Bitcoin from being deployed elsewhere while it secures the original loan.
“No rehypothecation protects against a different risk: the collateral being lent out or deployed elsewhere,” he said.
Reusing collateral can expose a borrower to additional counterparties because the lender may depend on another institution to return the assets. If the receiving institution defaults or freezes withdrawals, the original lender may be unable to return the Bitcoin even when the borrower meets the loan obligations.
An October 2025 report on a multi-signature Bitcoin platform described another structure intended to prevent rehypothecation. The Sygnum and Debifi product placed collateral in a wallet requiring approval from three of five signatories, including the borrower, the bank, and independent parties, before the Bitcoin could move.
Sahay said borrowers should examine several parts of a lending agreement rather than rely on one safeguard. Relevant questions include who holds the Bitcoin, whether collateral can be reused, how the lender funds the loan, which LTV thresholds apply, and what happens if either party encounters financial trouble.
Independent custody and no rehypothecation address different risks. Custody controls who can authorize a transfer, while the loan contract determines whether the lender has permission to deploy the collateral. Asset segregation and bankruptcy remoteness involve separate legal questions about whether creditors could claim the Bitcoin if the lending company failed.
The 2022 failures exposed opaque lending structures
According to Sahay, the collapse of Celsius, BlockFi, and Genesis showed why custody, lending, and asset deployment should not be combined without clear disclosures.
“Many of the failed lenders combined custody, lending and asset deployment in ways that made it difficult for customers to understand where their collateral was or how much risk was being taken with it.”
The Federal Trade Commission alleged in July 2023 that Celsius took title to more than $4 billion in customer crypto deposits. According to the agency, Celsius used customer assets to fund its operations, pay rewards, borrow from other institutions, and make risky investments despite telling users that deposits were safe and available.
BlockFi’s problems also extended beyond custody. In February 2022, the Securities and Exchange Commission charged the lender with failing to register its retail interest accounts and making false and misleading statements about the collateral backing institutional loans. BlockFi agreed to pay $100 million to the SEC and 32 US states before filing for bankruptcy in November 2022 following its exposure to FTX.
Genesis Global Capital suspended withdrawals that same month and filed for Chapter 11 protection in January 2023. In May 2024, the New York attorney general secured a $2 billion settlement intended to support recoveries for affected investors and barred Genesis from operating in the state. The attorney general said at least 29,000 New Yorkers had placed more than $1.1 billion into the Gemini Earn program connected to Genesis.
