Bitcoin Rehypothecation And Chain Forks

Several astute readers asked follow-up questions about the risks facing Wall Street amid a Bitcoin chain fork, a topic that I introduced in a recent Forbes.com piece (here). Put simply, chain forks and rehypothecated bitcoins don’t mix well and could cause the financial system to experience losses if it has any uncovered exposure to bitcoins amid a hard fork.

The chain-fork issue is confusing. Chain splits, for example, seem so simple—if you own bitcoin before a hard fork, you own the post-fork coins too, right?! Nope, not when uncovered bitcoin exposures are involved—these are positions in a bitcoin-substitute that are not 100% collateralized with real, on-chain bitcoins. The uncovered amount is the amount not backed by real bitcoins. For example, if the financial system has promised 5 bitcoins to customers but has only 3 bitcoins in its custody, the system’s…