In-depth Analysis of the Legal Terms of Mainstream Stablecoins: Holders May Have No Redemption Rights

The recent collapse of UST has brought a huge impact to the cryptocurrency market, raising questions about the stability of stablecoins. The most critical issue is whether stablecoins have sufficient fiat currency and asset backing.

Reserves are an important indicator for measuring the value peg of stablecoins. But if the legal terms of the stablecoin do not grant holders the right to convert on-chain assets into fiat currency, does this indicator still hold significance?

This article will focus on analyzing the terms of service of the two largest stablecoins by market capitalization, USDT and USDC, and the results may be surprising to many.

USDT Stablecoin Analysis

Article 3 of the USDT Terms of Service states that if there is a lack of liquidity, unavailability, or loss of reserves, Tether may delay the redemption or withdrawal of USDT and reserves the right to redeem in kind with securities and other assets from the reserves.

This clause implies that USDT is not fully backed by fiat currency, and Tether can decide the composition of its reserves. The Federal Reserve's report also points out that Tether's supporting assets may depreciate or lack liquidity under pressure, posing a risk of a run.

It is worth noting that Tether retains the right of "physical redemption." That is, when purchasing USDT with US dollars, they can also redeem bonds, stocks, and other assets instead of US dollars.

In addition, only "verified Tether customers" can directly redeem stablecoins from Tether. General users need to exchange through intermediaries such as exchanges. Individuals can also become "direct customers" of Tether, but must complete the KYC process.

USDC stablecoin analysis

Circle's redemption terms are stricter. The terms of service for USDC clearly state that Circle does not commit to holding a reserve of fiat currency equal to the amount of USDC, but instead supports it with dollar-denominated assets of equal value.

Although Circle promises that 1 USDC can be exchanged for 1 dollar, this only applies to its partner institutions. Individual users cannot become "direct users" of Circle and exercise redemption rights, and can only operate through partner institutions.

What is more concerning is that Circle has clearly stated that it does not guarantee that 1 USDC will always equal 1 dollar, nor is it responsible for losses resulting from fluctuations in the value of USDC.

Summary: Unequal Rights Between Issuers and Users

From a legal perspective, USDT and USDC are not equivalent to fiat currency. Their reserves are not entirely linked to fiat currency, but rather consist of various potentially depreciating assets.

Currently, users find it difficult to exercise their rights to freely exchange stablecoins through legal means. For Tether, although individuals can become direct customers, Tether reserves the right not to redeem fiat currency. For Circle, although it promises to redeem fiat currency, it does not acknowledge individuals' rights to exercise that promise.

The rights of stablecoin issuers and users are obviously unequal. Whether individuals can exchange back to fiat currency at any time, Tether and Circle have not provided a clear answer. This situation is worth the attention of holders of stablecoins.