Arvexo TeamOctober 6, 2026

10 min read

How Crypto Collateral Custody Works: Questions to Ask Your Lender

During a crypto loan your collateral sits somewhere, under someone's control, on some legal basis. Those three facts decide whether you get it back. Here is what to ask, and how Arvexo answers.

In brief

Every custody arrangement answers three questions: who holds the keys, whether your collateral is kept apart from everyone else's, and what can be done with it while your loan runs.
In an insolvency the contract decides whether you own your collateral or are a creditor. In Celsius, it decided against the customers.
Arvexo holds collateral through Ledger and Cobo Custody, in segregated wallets dedicated to your loan, and never lends it out or rehypothecates it.

When you take a crypto-backed loan, your collateral leaves your wallet. After that it sits somewhere, under someone's control, on some legal basis. Most borrowers can answer the first part and not the other two.

Those other two decide whether you get your collateral back if something goes wrong at the lender. This article explains the arrangements that sit behind the word "custody", and what to ask so you know which one you are in.

The three questions custody actually answers

Strip away the vocabulary and every custody arrangement answers three things.

Who holds the keys? The lender, a third-party custodian, or some split between them and you.

Is your collateral kept apart? Separately identifiable as yours, or pooled with everyone else's and the company's own.

What can be done with it? Held untouched, or lent, staked or otherwise used while your loan runs.

A lender can be honest about all three and still be a poor fit for you. A lender that is vague about any of them is telling you something.

The custody models you will meet

Lender-held. The lender controls the keys. Simple, fast, and you are relying entirely on that company's controls and solvency.

Third-party custodian. A separate, specialist firm holds the collateral. The lender instructs it, but it is a different balance sheet. Arvexo uses this model, with Ledger and Cobo Custody.

Collaborative or multi-signature. Keys are split between two or three parties, often including the borrower, so no single party can move the collateral alone. Common in bitcoin-only lending, less common across multiple assets.

None of these is automatically correct. Multi-signature gives you the most control and the most responsibility. A third-party custodian gives you separation from the lender's own balance sheet. Lender-held gives you the least of both.

Segregation, and why it is the word that matters

Segregated means your collateral is identifiable as yours. Pooled, or omnibus, means it sits in a shared wallet and your claim is an entry in the lender's ledger rather than a specific holding.

The difference is invisible while everything works. It becomes the whole story in an insolvency, because at that point the question is not where the coins are but whose they are.

Rehypothecation, in plain words

Rehypothecation means re-using collateral you posted. Your coins go out the door to earn the lender a return while your loan is open.

It is not inherently improper and it is common in traditional finance under specific rules. In crypto it is the practice that turned a fall in prices into a series of failures in 2022. The SEC has warned that crypto assets held in interest-bearing accounts "may be used to invest in various crypto asset-related products, schemes or other activities, including lending programs" (SEC Investor Bulletin, 14 February 2022).

Ask directly whether your collateral can be re-used, and ask which clause says so. "We don't currently do that" is not the same answer as "we are contractually prohibited from doing that."

What happens if the lender fails

This is where the paperwork stops being paperwork.

In January 2023 the US Bankruptcy Court for the Southern District of New York held in the Celsius bankruptcy that "the cryptocurrency assets deposited in Earn Accounts are presumptively property of the estate", rather than of the account holders (In re Celsius Network LLC). The terms of use determined who owned the crypto. Depositors became unsecured creditors of a bankrupt company, standing in line.

The Federal Reserve's own research recorded how thin the margin had been: "Celsius, a lending platform, disclosed that it had a 0.1 percent capital ratio before stress forced it to freeze withdrawals and then declare bankruptcy" (Federal Reserve, FEDS 2022-058).

It was not the only one. The FTC stated that Voyager customers "were locked out of their cash accounts for more than a month and lost more than $1 billion in crypto assets" (FTC, October 2023). The SEC recorded that in November 2022 Genesis "announced that it would not allow its Gemini Earn investors to withdraw their crypto assets" (SEC, January 2023).

Those were yield products rather than loan collateral, and the distinction is real. The transferable lesson is not about product type. It is that the contract decided ownership, and almost nobody had read it.

There is also no safety net behind it. The SEC noted in the same bulletin that crypto assets sent to such companies "are not currently insured". In the UK, the Financial Conduct Authority says that with crypto "it is highly unlikely you will be covered by the Financial Services Compensation Scheme" (FCA).

Custody has a tax dimension too, at least in the UK

This surprises people. HM Revenue and Customs takes the view that where "a DeFi lending platform is allowed to deal as it wishes with the tokens received as collateral, this will be a strong indicator that the DeFi lending platform has acquired the beneficial ownership of those tokens", which would make posting the collateral a disposal for capital gains purposes. Where the platform "is specifically restricted from dealing with the tokens received as collateral", beneficial ownership stays with the borrower (HMRC, CRYPTO61640).

Two caveats. HMRC manuals state HMRC's view rather than the law. And that guidance is written about decentralised finance platforms; it does not say whether the same analysis applies to a centralised lender, so do not assume it does or does not.

The point for this article is narrower and holds regardless: the same contractual question, can the platform deal with your tokens, drives both who owns your collateral in an insolvency and, potentially, whether handing it over was a taxable event. One clause, two consequences. Take advice on your own position.

How Arvexo holds collateral

Arvexo's published arrangements, so you can hold us to the questions below:

Collateral is held through Ledger and Cobo Custody, in segregated wallets dedicated to your loan, separate from Arvexo's operational funds.
It is never lent out, rehypothecated or used for any purpose other than securing your loan.
Every outbound transfer needs multi-party approval, wallet balances are reconciled against loan records continuously, and releases go only to wallet addresses you have verified. A release to a newly added address may be held for 24 hours.
You can see the on-chain balance of your collateral wallet from your loan page at any time.
After the final payment is matched, collateral is released to a wallet of your choice, typically within one business day.

Sources: the security page, how collateral is stored and protected and when is my collateral released.

The six questions, and what a good answer sounds like

1. Who holds the collateral?
Good: a named custodian, or a clearly described in-house arrangement with named controls.
Weak: "institutional-grade custody infrastructure."
Arvexo: Ledger and Cobo Custody.

2. Is it segregated or pooled?
Good: segregated, with an explanation of how your holding is identified as yours.
Weak: an answer about security rather than about separation. They are different questions.
Arvexo: segregated wallets dedicated to your loan, with the on-chain balance visible from your loan page.

3. Can it be lent, staked or re-used?
Good: no, and here is the clause.
Weak: not at the moment.
Arvexo: never lent out, rehypothecated or used for any purpose other than securing your loan.

4. In an insolvency, am I an owner or a creditor?
Good: a specific clause dealing with title to collateral, which you can read now.
Weak: any answer that does not point at a document. Ask us for the clause, as you would anyone.

5. What happens operationally if the lender goes under?
Good: an explanation of how the custodian relationship works independently of the lender.
Weak: reassurance that it will not happen.

6. How and when do I get the collateral back?
Good: a described release process with a timeframe.
Weak: "shortly after repayment."
Arvexo: a release option on your loan page after the final payment is matched, confirmed by email, sent to a verified wallet typically within one business day.

Reading the answers

Ask for the clause, not the assurance. An email that contradicts the loan agreement is worth nothing; the agreement governs.

Treat "we don't do that" and "we cannot do that" as completely different answers. The first is a policy and policies change under pressure. The second is a promise you can hold someone to.

And check that the answer covers your asset. Arrangements often differ between bitcoin and everything else.

How to compare crypto lenders covers the wider set of questions, of which these six are the custody part. And before you post anything, work out how much collateral the loan you want would actually require in the loan calculator. The custody questions above get sharper when the amount is a real number rather than an abstraction.

Frequently asked questions

What does segregated custody mean?

Your collateral is held in a wallet identifiable as yours, rather than pooled in a shared wallet where your claim is only an entry in the lender's records. Segregation is what makes it possible to point at your coins, and to argue that they are yours if the lender fails.

What is rehypothecation?

The re-use of collateral by the party holding it, for example lending it to someone else or posting it as collateral for the lender's own borrowing. Once that happens, your collateral is exposed to a second set of risks you did not choose.

Is crypto loan collateral insured?

Not by any public scheme. The SEC notes that crypto assets sent to such companies are not currently insured, and the FCA says cover under the UK compensation scheme is highly unlikely. Any insurance would be the lender's or custodian's own arrangement, so ask whether one exists, what it covers and who the beneficiary is.

Can I check that my collateral is still there?

At Arvexo, yes: the on-chain balance of your collateral wallet is visible from your loan page. Ask any lender whether you can verify your holding independently rather than taking a statement on trust.

Sources

Collateral can fall in value and be sold. This article is for general informational purposes only and does not constitute financial, investment, legal, or tax advice.