For many, many, many purposes in financial markets, you have to post collateral. Most importantly, if you want to borrow money in some of the biggest lending markets, you put up some collateral and get the money; when you repay the money you get the collateral back. If you do certain derivatives trades, you have to post collateral to ensure that you are good for your obligations. If you want to sell a stock short, you borrow the stock and post collateral to secure your obligation to return it. If you are a retail brokerage, your customers do trades today but actually hand over the money on Friday, and meanwhile you post collateral with a clearinghouse to guarantee their trades. The plumbing of global finance works through collateral: You and I can agree to do stuff in the future, without necessarily knowing each other well or trusting each other much, because we have posted collateral to ensure that we’re good for our promises.

Often the way this works is that the collateral consists of some securities that you own, and the safer the securities are — the more likely they are to retain their value — the better they are as collateral. The best collateral, for most things in US finance, is short-term US Treasury bills, which have no credit risk and very little interest-rate risk and are pretty much always worth a pretty predictable amount. Longer-term Treasury bonds are also good, though they have more rate risk. Some other kinds of collateral — agency bonds, municipal bonds, highly rated corporate and structured-finance bonds, etc. — are also quite good and acceptable for many purposes, though not all; some sorts of collateral-demanding businesses are very picky and will accept only Treasuries. And then there is a lot of other stuff: Junk bonds, penny stocks, private-company stocks, fractional ownership of racehorses, any sort of financial asset you can name. So much crypto. All of this stuff could be collateral, for some purposes; somebody would probably lend you money against any of it. But if you bring it to the GCF repo market or the Fed’s discount window they will turn up their noses; they don’t take fractional racehorses there.

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