Analysis of Terms for Stablecoin Issuers: Controversy over Holder's Redemption Rights

The recent collapse of UST has caused a strong shock in the cryptocurrency industry, leading to more doubts about the stability of stablecoins. The most critical question is whether stablecoins have sufficient fiat currency and other assets as backing.

Reserves are indeed an important indicator for measuring the value anchoring of stablecoins. However, if the legal terms of the stablecoin do not grant holders the explicit right to exchange on-chain assets for fiat currency, the significance of this indicator is questionable.

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

USDT stablecoin

The third clause of the USDT terms of service states that if there is a liquidity shortage, unavailability, or loss of reserves, a trading platform has the right to delay the redemption or withdrawal of USDT, and may even use securities and other assets from the reserves for physical redemption.

This clause has raised some questions. If USDT is indeed "100% backed by reserves" as claimed, why is there a need for delayed redemptions? In fact, a certain trading platform states that USDT is "valued" at a 1:1 peg with the US dollar, but it is not fully backed by fiat currency. The composition of the reserves is determined by the trading platform itself.

The recent assessment report from the Federal Reserve Board indicates that the supporting assets of USDT may depreciate or lack liquidity under pressure, leading to a risk of a run, and insufficient transparency may exacerbate these risks.

It is worth noting that only "verified customers" are eligible to directly redeem stablecoins from a certain trading platform. Generally speaking, the direct customers of a certain trading platform are exchanges and other financial institutions, while end users usually exchange stablecoins through these "direct customers." However, individual users can also become "direct customers" of a certain trading platform after completing the KYC process, thereby obtaining redemption rights.

USDC stablecoin

The redemption terms for USDC appear to be stricter than those for USDT. The first article of the USDC service terms clearly states that a certain DEX does not guarantee a reserve of fiat currency equal to the amount of USDC held, but rather supports its stablecoin with dollar-denominated assets of equal value.

Although a certain DEX promises to exchange 1 USDC for 1 dollar, this rule only applies to its partners, i.e., exchanges, financial companies, and other institutions (referred to as "Class A users"). Individual users cannot become "direct users" of a certain DEX and exercise redemption rights; they can only become clients of the partners of a certain DEX.

What is more concerning is that Section 13 of the USDC Terms of Service clearly states that a certain DEX does not guarantee that the value of 1 USDC will always be equal to 1 dollar, as they cannot control how third parties quote or trade USDC. This means that a certain DEX will not impose specific terms on its partners for end users and will not be responsible for any potential losses caused by fluctuations in the value of USDC.

Summary: The rights of stablecoin issuers and users are not equal.

From a legal perspective, USDT and USDC are not equivalent to fiat currency. The 1:1 value reserves claimed by the two companies are not fully pegged to fiat currency but include various assets that may depreciate, which could affect the liquidity of the stablecoin.

Currently, users may not be able to freely exchange stablecoins through legal means. For USDT, while individuals can become direct clients, a certain trading platform reserves the right not to redeem fiat currency. For USDC, although a certain DEX promises to allow the redemption of fiat currency, it does not recognize individuals' rights to exercise that promise.

There is a clear imbalance in the rights between stablecoin issuers and users. Whether individuals can exchange stablecoins for fiat currency at any time and place still lacks a clear answer. This situation highlights the importance of regulation in the stablecoin market and the protection of user rights, and it also reminds investors to be particularly cautious when choosing and using stablecoins.