A crypto-backed credit line is a secured loan. The borrower keeps the economic exposure to the asset and receives dollars against it. Three questions decide whether that is a sound trade for an institution: who holds the collateral, whether the lender can reuse it, and how the lender responds when the collateral loses value.
For shorter definitions, read the Education Hub entries on loan-to-value, LTV versus LLTV and liquid staking tokens. The product view is on For Digital Asset Holders.
Why institutions borrow USDC against BTC or ETH
Foundations, validators, funds and corporate treasuries often hold a large position that they do not want to sell. Selling exits the position at the sale price and ends any staking rewards. Pledging the same position keeps the upside and the rewards. Rekord's published position is that a pledge is not a sale, so no disposal occurs; consult your own tax advisor (see the comparison table on For Digital Asset Holders).
The use of the proceeds varies. A foundation funds grants and operating costs. A validator operator covers infrastructure in dollars while its stake keeps running. A treasury wants dollar yield that does not move with the asset it holds. In each case the borrower wants USDC now and the asset back later, unchanged.
The institutional side of this market is covered on For Institutions. This guide stays on the mechanics.
Segregated custody, commingled CeFi and permissionless pools
Where the collateral sits during the loan is the first term to read. This guide compares three models.
Segregated custody with a qualified custodian
The collateral moves into a wallet that holds only that borrower's assets, at a custodian that is a third party to both sides, under a security interest in favor of the lender. The lender can enforce on default and cannot otherwise use the assets. Segregation is what regulators now ask of crypto custodians: under MiCA Article 75(7) a custody provider must segregate client crypto-assets from its own holdings, on the ledger and legally, so that the provider's creditors have no recourse to the assets held in custody. The FSB's high-level recommendations (Recommendation 5) ask authorities to protect customers' ownership rights "through segregation and record-keeping requirements" so as to minimise "the risk of loss, misuse of or delayed access to assets, including in the event of a service provider's insolvency". The RCM line uses the term "qualified custodian" as published on For Digital Asset Holders.
Commingled custody at a CeFi lender
The collateral is transferred to the lender's own wallets and pooled with the collateral of other borrowers. The borrower holds a claim against the lender for the return of an equivalent amount, and the lender may lend the collateral on. This is the combination of custody and lending in one firm that the FSB flags in Recommendation 9 on service providers with multiple functions.
Permissionless liquidation pools
In an on-chain lending protocol the collateral sits in a smart contract. No company holds it, and the rules of the pool are public code. The position is subject to automated liquidation by any third party once it crosses the pool's threshold. Liquidators are "permissionless participants" (Morpho Docs, Liquidation on Morpho), and "any network participant can initiate the process" (Aave Help, Health Factor & Liquidations). The position also carries smart contract, oracle and governance risk.
Rehypothecation and why it matters
Rehypothecation is the reuse of a client's collateral by the intermediary that holds it. The Financial Stability Board defines it as "any use of client assets by a financial intermediary"; an IMF working paper describes it as the practice that lets collateral posted to an intermediary be used again as collateral for that intermediary's own funding. In traditional securities markets the practice is bounded by rules such as SEC Rule 15c3-3, which requires a broker-dealer to keep physical possession or control of customers' fully paid and excess margin securities. Crypto lending, by contrast, "usually takes place without any formal supervision or regulatory checks and balances", as the ECB observed in its May 2022 Financial Stability Review.
The FSB notes that re-hypothecation and collateral re-use "may contribute to a build-up of leverage, and increase interconnectedness among market participants", and "may create operational impediments that hinder clients from promptly accessing their securities in the event that a financial intermediary faces insolvency". The same pattern applies to a crypto lender that reuses collateral, regardless of the name on the door.
- Collateral is lent on. The lender takes borrower collateral and places it with a third party, in a yield venue, or against its own obligations, in exchange for a return that funds its own book.
- Duration and liquidity stop matching. The borrower expects the collateral back on repayment. The lender has deployed it on terms that cannot be unwound on the same day. The FSB lists "liquidity and maturity mismatches" and leverage among the vulnerabilities that crypto lending inherits from traditional finance in The Financial Stability Risks of Decentralised Finance.
- A price move or a counterparty failure exposes the gap. Several borrowers ask for their collateral at the same time, or the lender's own creditors call their loans. The Federal Reserve's Financial Stability Report of November 2022 (Box 4.1) describes the 2022 episode in these terms: the digital-asset ecosystem "faces similar vulnerabilities and risks to those that can occur in traditional finance, including runs, excessive leverage, operational risk, opacity, and fraud", and several entities "found themselves in financial distress, sometimes leading to bankruptcy".
- The borrower waits on the insolvency process. Where collateral was commingled and reused, the borrower's access to it depends on the estate, not on a specific wallet. Segregation exists to prevent this outcome: MiCA Article 75(7) puts custodied assets beyond the reach of the provider's creditors, MiCA Article 70(1) requires arrangements "to prevent the use of clients' crypto-assets for their own account", and FINMA Guidance 08/2023 explains that under Article 242a of the Swiss Debt Enforcement and Bankruptcy Act the central criterion for segregating crypto-assets from a custodian's bankruptcy estate is that they are "held in readiness for the customer at all times".
A non-rehypothecated line removes the first step, so the chain never starts. On the RCM line the collateral stays in segregated custody with a qualified custodian and is never lent on (For Digital Asset Holders, FAQ "Is my collateral rehypothecated?").
Staked ETH and validator positions stay active while pledged
For validators and foundations the collateral is often not idle ETH but a validator stake or a liquid staking token. A lender that requires unstaking imposes a real cost. Validator exits "are processed through a similar rate-limited queue" on Ethereum (ethereum.org, Staking), the wait depends on how many validators are exiting at the same time (ethereum.org, Staking withdrawals), and the activation queue applies again when the loan closes.
On the RCM line, foundations, validators and institutional holders pledge BTC, ETH, or staked and liquid-staked positions. The collateral stays in segregated custody with a qualified custodian, nothing is unstaked, and validator staking rewards keep accruing while the position is pledged. This is Rekord's published description of the line on For Digital Asset Holders ("Validator & staking collateral").
A liquid staking token is an ERC-20 token "that represents a claim on staked ETH and the rewards it earns"; the holder can transfer or sell it while "the underlying ETH stays staked on the consensus layer", and its "market price can deviate from the value of the ETH backing it, particularly during periods of market stress" (ethereum.org, Liquid & pooled staking). That deviation feeds straight into the LTV of a position collateralised with the token. How these tokens accrue and trade is explained in Liquid staking tokens. Whether a permissionless pool accepts a liquid staking token depends on its parameters. On Aave the risk parameters are set by Aave and "can be adjusted by Aave governance" (Aave Docs, Risks). On Morpho, market creation is permissionless and the creator picks the collateral asset and an LLTV from a set approved by Morpho governance (Morpho Docs, Variable Rate Market). A commingled lender treats the token under its own terms.
LTV, LLTV, margin calls and the liquidation waterfall
This section describes the market baseline for CeFi lenders and DeFi pools. It is the mechanism every borrower should understand before reading any term sheet. The published position of the RCM line is in the next section.
Two ratios
LTV, loan-to-value, is the loan amount divided by the market value of the collateral. It is set at origination and moves every time the price moves. See What is LTV?
LLTV, liquidation loan-to-value, is the LTV at which the lender or the protocol starts to liquidate the collateral. In the Morpho docs, "a position becomes liquidatable when its LTV exceeds the market's Liquidation Loan-To-Value (LLTV)", and an LLTV of 80% means that against $100 of collateral "the maximum one can borrow in value is $80" (Liquidation on Morpho, Variable Rate Market). Aave expresses the same limit as a liquidation threshold inside a health factor: "Health Factor = (Total Collateral Value × Weighted Average Liquidation Threshold) / Total Borrow Value", and a liquidation occurs when the health factor falls below 1 (Aave, Health Factor & Liquidations). The distance between the origination LTV and the LLTV is the price drop the position can absorb. See LTV vs LLTV.
The margin call
The margin call comes from securities lending. In a US brokerage margin account, when equity falls below the maintenance requirement the firm issues a maintenance margin call with a deadline it sets, and if the call is not met "the firm can sell the securities in your account to cover the margin deficiency" and "can sell your securities without notice" (FINRA, Brokerage Accounts). A CeFi crypto lender that uses margin calls follows the same shape: a warning threshold between the origination LTV and the LLTV, a cure window, and a required level to restore, each set by the lender in its own terms, either by repaying part of the loan or by posting more collateral.
The liquidation waterfall
If the cure does not arrive, or if the price moves faster than the cure window, the position crosses the LLTV and liquidation begins. The lender sells enough collateral to bring the LTV back under its limit, deducts a liquidation penalty where its terms provide one, and returns what remains to the borrower. In a permissionless pool a third-party liquidator repays part of the debt in exchange for collateral at a discount. On Morpho the discount is the Liquidation Incentive Factor, "approximately 1.05 (5% bonus)" for an 86% LLTV market (Liquidation on Morpho). On Aave the liquidator may repay "up to 50% of total debt" while the health factor is above 0.95 and "up to 100% of debt" at or below it, and receives the collateral plus a liquidation bonus (Aave, Health Factor & Liquidations).
Two features of this baseline hurt borrowers in stress. Liquidation is mechanical. And in a fast market many positions cross their thresholds together: the ECB's May 2022 Financial Stability Review observed that in crypto markets "there can be significant spikes in the volume of liquidations, which could cause further price declines".
You can test any combination of price, loan and LLTV on the crypto LTV and liquidation calculator.
How the RCM line handles volatility
The published position on For Digital Asset Holders is one sentence: options banding eliminates margin calls under normal market conditions.
The bands, the price levels and the behavior of the line outside normal market conditions are part of each mandate and are not published on this site. Rates, LTV and eligibility are set by the Rekord Capital Markets (RCM) desk for each mandate. A counterparty that is reviewing the line receives those terms directly from the desk.
Where the USDC goes
The proceeds of the RCM line are not a cash balance. They deploy into the same RCM-operated Rekord Vaults that stablecoin holders use: a curated mix of insured receivables, real-asset lending and structured private credit, underwritten and proven on the Rekord stack. The line earns USD returns that are not correlated with the pledged asset (For Digital Asset Holders, FAQ "What happens to the capital behind the credit line?").
This is a deliberate exposure and it should be read as one. The deployed line carries the credit risk of the RCM vault strategies it funds. The collateral and cashflows behind those strategies are anchored and attested on Rekord Kloud and the Proof Console, so what backs the line is independently verifiable.
Comparison: segregated line, commingled lender, liquidation pool
The RCM column uses the wording published on For Digital Asset Holders. The other two columns describe the market baseline, with the pool column sourced to the Aave and Morpho documentation cited above.
| Dimension | RCM segregated, non-rehypothecated line | Commingled CeFi lender | Permissionless liquidation pool |
|---|---|---|---|
| Custody | BTC / ETH (segregated custody) with a qualified custodian. | Collateral moves to the lender's wallets, pooled with other borrowers' assets. | Collateral sits in a smart contract under protocol rules. |
| Rehypothecation | Zero rehypothecation · Segregated wallet. Collateral is never lent on. | Depends on the lender's terms; the lender may lend the collateral on. | No company reuses it. Whether the asset is lent to other users depends on the protocol: on Aave, supplied tokens are made available to borrowers and can serve as collateral; in a Morpho market, collateral and the loan asset are supplied separately. |
| Staking rewards | Keep accruing. No unstaking is required. | Depend on the lender's terms. | Accrue only if the pool accepts a liquid staking token as collateral. |
| Liquidation trigger | Options banding eliminates margin calls under normal market conditions. Mandate terms are set by the RCM desk and are not published. | The lender's LLTV, set in its terms. | The market's LLTV (Morpho) or a health factor below 1 (Aave), read from the protocol's price oracle. |
| Margin process | Options banding eliminates margin calls under normal market conditions. | Margin call, cure window, then liquidation under the lender's terms. | No call. Automated liquidation by any third party once the threshold is crossed. |
| Counterparty exposure | Collateral stays with a qualified custodian under qualified custody arrangements and perfected security interests. The deployed line carries the credit risk of the RCM vault strategies it funds. | Exposure to the lender's balance sheet and to anyone it lends the collateral to. | Exposure to smart contract, oracle and governance risk. |
| Transparency | Rekord Kloud and the Proof Console: cryptographic proof from collateral through distribution. | Lender statements and periodic attestations. | On-chain pool state. |
Worked example: an illustrative 10 BTC position
The example applies the market-baseline mechanics of the LTV section to a round position. Illustrative, not RCM terms. The LLTV of 70.0% is an illustrative figure that sits below the 80% and 86% examples used in the Morpho documentation; the RCM line does not publish an LLTV, and no RCM rate is used.
Inputs
- Collateral: 10 BTC at $100,000 per BTC (illustrative price)
- Loan: $400,000 USDC (illustrative)
- Illustrative LLTV: 70.0%
- Later price for the cure step: $60,000 per BTC (illustrative)
Results
| Step | Formula | Result |
|---|---|---|
| Collateral value at origination | 10 × $100,000 | $1,000,000 |
| LTV at origination | $400,000 ÷ $1,000,000 | 40.0% |
| Price at which LTV reaches LLTV | $400,000 ÷ (10 × 70.0%) | $57,143 per BTC |
| Price drop to that level | 1 − 40.0% ÷ 70.0% | 42.9% |
| LTV at $60,000 per BTC | $400,000 ÷ (10 × $60,000) | 66.7% |
| Cure by repayment, back to 40.0% LTV | $400,000 − 40.0% × $600,000 | Repay $160,000 USDC |
| Cure by extra collateral, back to 40.0% LTV | $400,000 ÷ 40.0% ÷ $60,000 − 10 | Add 6.67 BTC |
At $60,000 the position is above its origination LTV but below the illustrative LLTV, which is where a baseline lender issues a margin call. The two cure routes restore the same ratio and cost different things: the repayment uses USDC the borrower may have already deployed, and the extra collateral uses BTC the borrower may be holding for other reasons. A further fall to $57,143 with no cure would start the liquidation waterfall at a baseline lender or pool.
Run your own figures on the crypto LTV and liquidation calculator.
The RCM credit line in brief
The RCM Digital Asset Credit Line is in institutional onboarding. A USDC credit line against segregated, non-rehypothecated BTC or ETH collateral, deployed into RCM credit strategies.
- Borrow USDC against BTC or ETH without moving or rehypothecating custody
- Staked and locked validator positions remain active while pledged
- Proceeds deploy directly into verified RCM private credit strategies
| Term | Value |
|---|---|
| Operator | Rekord Capital Markets (RCM) |
| Collateral asset | BTC / ETH |
| Standard | ERC-7540 (Lagoon) |
| Network | Ethereum Mainnet |
| Settlement | Periodic NAV settlement |
| Pledged Collateral | BTC / ETH (segregated custody) |
| Credit Line Currency | USDC deployed into RCM vaults |
| Custody Guarantee | Zero rehypothecation · Segregated wallet |
| Allocation Status | Bespoke institutional mandates |
Rates, LTV and eligibility are set by the Rekord Capital Markets (RCM) desk for each mandate and are not published on this site. The line is offered to qualified counterparties only. The product page is For Digital Asset Holders; the vaults the line deploys into are listed on Rekord Vaults.
Entity separation
Two entities share the work behind the credit line, and the split is deliberate.
Rekord Capital Markets (RCM) operates the credit line and the vaults it deploys into. It sets the mandate terms, holds the security interest over the segregated collateral, and deploys the USDC into its credit strategies.
Rekord AG, Zug, Switzerland, is a separate software provider. Its Trust Layer, Rekord AI and Rekord Kloud, read through the Proof Console, provides the underwriting and the proof of the records behind the strategies the line funds. Rekord AG does not hold depositor funds.
Institutions that are reviewing the line as a borrower, or the vaults it funds as a depositor, can see how it fits their mandate on For Institutions.
Sources
- Re-hypothecation and collateral re-use: Potential financial stability issues, market evolution and regulatory approaches, Financial Stability Board, 25 January 2017. Supports: the definition of rehypothecation; leverage, interconnectedness and delayed client access in an intermediary's insolvency.
- The (Sizable) Role of Rehypothecation in the Shadow Banking System, IMF Working Paper WP/10/172, Singh and Aitken, July 2010. Supports: rehypothecation as collateral re-used for the intermediary's own funding.
- 17 CFR § 240.15c3-3 - Reserves and custody of securities, Legal Information Institute, Cornell Law School. Supports: the traditional-finance analogue, possession or control of customers' fully paid and excess margin securities.
- High-level Recommendations for the Regulation, Supervision and Oversight of Crypto-Asset Activities and Markets: Final report, Financial Stability Board, 17 July 2023. Supports: Recommendation 5 on segregation and record-keeping and Recommendation 9 on providers that combine custody and lending.
- The Financial Stability Risks of Decentralised Finance, Financial Stability Board, 16 February 2023. Supports: liquidity and maturity mismatches, leverage and interconnectedness as inherited vulnerabilities.
- Financial Stability Report, November 2022, Board of Governors of the Federal Reserve System, Box 4.1 "Digital Assets and Financial Stability". Supports: the 2022 failure pattern (runs, excessive leverage, opacity, distress and bankruptcies).
- Decrypting financial stability risks in crypto-asset markets, European Central Bank, Financial Stability Review, May 2022. Supports: crypto lending without formal supervision, and liquidation spikes that push prices further down.
- Article 75 Providing custody and administration of crypto-assets on behalf of clients, ESMA Interactive Single Rulebook, MiCA (Regulation (EU) 2023/1114). Supports: segregation of client crypto-assets and no recourse for the provider's creditors.
- Article 70 Safekeeping of clients' crypto-assets and funds, ESMA Interactive Single Rulebook, MiCA (Regulation (EU) 2023/1114). Supports: arrangements to prevent the use of clients' crypto-assets for the provider's own account.
- FINMA Guidance 08/2023: Staking, Swiss Financial Market Supervisory Authority, 20 December 2023. Supports: Article 242a of the Debt Enforcement and Bankruptcy Act, the "held in readiness at all times" test, and the open legal question for staked assets with lock-ups or slashing.
- Ethereum staking: How does it work?, ethereum.org. Supports: validator exits through a rate-limited queue.
- Staking withdrawals, ethereum.org. Supports: exit time depends on how many validators are exiting at the same time.
- Liquid & pooled staking, ethereum.org. Supports: the definition of a liquid staking token and its price deviation from the backing ETH.
- Liquidation on Morpho, Morpho Docs. Supports: the LLTV definition, when a position becomes liquidatable, the Liquidation Incentive Factor, and permissionless liquidators.
- Variable Rate Market (Morpho Blue), Morpho Docs. Supports: the 80% LLTV example, permissionless market creation, LLTV chosen from a governance-approved set, and collateral supplied separately from the loan asset.
- Health Factor & Liquidations, Aave Help. Supports: the health factor formula, liquidation below 1, the 50% and 100% repayment tiers, the liquidation bonus, and permissionless liquidations.
- Risks, Aave Docs. Supports: LTV and liquidation thresholds set by Aave and adjustable by Aave governance.
- Supply Tokens, Aave Help. Supports: supplied tokens are made available to borrowers and can be used as collateral.
- Brokerage Accounts, FINRA. Supports: the maintenance margin call and the firm's right to sell securities without notice.
- For Digital Asset Holders, Rekord. Supports: qualified custodian, zero rehypothecation, staking rewards keep accruing, options banding under normal market conditions, the tax note, where the USDC is deployed, and the RCM column of the comparison table.
- Rekord Vaults, Rekord. Supports: the mandate terms of the RCM Digital Asset Credit Line.