Bitcoin analyst Willy Woo is sounding the alarm over Strike’s updated terms of service. He says the company, led by Jack Mallers, now allows customer collateral, like Bitcoin, to be handed over to third parties to make money. The problem? Users aren’t told where their BTC is going, which adds risk without giving them any way to judge it.
Woo’s analysis comes at a time when crypto platforms are under renewed scrutiny for how they manage user assets, especially in the wake of past collapses like FTX and Genesis.
What the Terms Allow
Under Strike’s current terms of service, the company is permitted to conduct a single re-hypothecation of customer assets. This means that user collateral, such as Bitcoin, can be handed over to a third-party capital provider, like NYDIG, for financial operations.
In this structure, Strike could deposit customer BTC with NYDIG in exchange for USD, which it may then lend out to borrowers while earning a spread. Woo notes that while only one level of re-hypothecation is allowed, the arrangement still carries significant risk.
“The capital provider cannot further re-hypothecate,” Woo explained. But the single hand-off still introduces risks, especially without transparency.
A Warning from History
Woo pointed to the infamous collapse of several major firms in 2022 to highlight how risky these arrangements can become. Gemini had re-hypothecated customer funds to Genesis, which in turn passed them to Alameda Research. Alameda then used the funds for high-risk trades and ultimately suffered massive losses.
Each layer of re-hypothecation increased the risk exposure. While Strike’s policy blocks multiple levels, Woo warns that even a single re-hypothecation is enough to introduce vulnerabilities, particularly when users are not informed where their assets are being held.
One of the central issues, according to Woo, is that Strike’s terms do not require the company to inform users about the third parties handling their collateral. This absence of disclosure means customers cannot evaluate the risk themselves.
“If Strike decided to onboard an entity like ‘Alameda 2’ and send them your BTC, they don’t need to tell you,” Woo said.
The concern is not just theoretical. Without clear oversight or legal protections, user funds could be mismanaged, poorly invested, or even lost.
Willy Woo also said that Strike’s way of handling customer funds is much weaker than how it works in traditional finance. In regular financial systems, a trusted third party such as a regulated bank or custodian holds the customer’s assets. This kind of setup helps make sure that everyone involved follows clear legal rules and that the funds are protected from being misused.
Such frameworks reduce the possibility of one party misusing the collateral. Woo suggests that similar protections can be built in the Bitcoin ecosystem using multi-signature contracts involving the borrower, the lending platform, and the capital provider.
Woo concluded by calling for industry-wide adoption of more robust and transparent custody models. He argued that Strike’s current terms open the door to the same types of risks that brought down firms in past crypto crises.
While Strike’s limits on recursive re-hypothecation are a step in the right direction, the overall lack of visibility for users remains a serious issue. The crypto community, he argues, should push for institutional-level custody standards to ensure long-term security and trust in the ecosystem.
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