Analysis of Stablecoin Service Terms: Risks in Redemption Rights

The recent collapse of UST has brought a huge shock to the crypto industry, raising questions about the stability of stablecoins. The most concerning issue is whether stablecoins have sufficient fiat currency and other assets to back them.

Reserves are undoubtedly a key indicator for measuring the value anchoring of stablecoins. However, if the legal terms of the stablecoin do not grant holders the explicit right to convert on-chain assets into fiat currency, the significance of this indicator is questionable.

This article will focus on analyzing the service terms of the two largest stablecoins, USDT and USDC, and the results may come as a surprise to many.

USDT stablecoin Analysis

Article 3 of the USDT Terms of Service states that if there is a liquidity shortage, unavailability, or loss of reserves, a certain platform may delay the redemption or withdrawal of USDT. The platform also reserves the right to redeem USDT physically through securities and other assets in the reserves.

The meaning of this provision is worth pondering. If USDT is indeed claimed to be 100% backed by reserves, why is there still a need to delay redemptions? The answer may be hidden in other parts of the provision.

A certain platform claims that USDT is "valued" at a 1:1 peg with the US dollar, but it is not entirely backed by fiat currency. The composition of the reserves is determined by the platform itself.

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

It is worth noting that a certain platform reserves the right of "physical return." This means that even if users purchase USDT with USD, the platform may choose to return bonds, stocks, or other reserve assets instead of USD.

Only "verified customers" are eligible to directly redeem USDT from a certain platform. Generally speaking, direct customers are exchanges and financial institutions, rather than end users. Individual users need to complete the KYC process to become direct customers and obtain redemption rights.

USDC stablecoin analysis

The USDC redemption terms of a certain platform seem to be stricter. The service terms for USDC clearly state that the platform does not promise to hold a reserve of fiat currency equivalent to the amount of USDC, but instead supports it with assets valued in equivalent US dollars.

Although the platform promises "1 USDC can be exchanged for 1 dollar", this only applies to its partners, namely "Class A users" such as exchanges and financial institutions. Individual users cannot become direct clients to exercise redemption rights and can only open accounts through partners (such as exchanges).

What is even more concerning is that the USDC service terms explicitly state that they do not guarantee 1 USDC will always equal 1 dollar, as the platform cannot control how third parties quote or trade USDC. This means that the platform does not enforce specific terms for its partners to offer to end users and is not responsible for potential losses arising from fluctuations in the value of USDC.

Summary: Unequal Rights

From a legal perspective, USDT and USDC are not equivalent to fiat currency. The 1:1 value reserves claimed by the two platforms are also not entirely tied to fiat currency, but rather include various assets that may depreciate and affect liquidity.

In short, current users may not have the right to freely exchange stablecoins through legal means. For USDT, although individuals can become direct clients, the platform reserves the right not to redeem fiat currency. For USDC, although the platform promises to redeem fiat currency, it does not recognize individuals' right to exercise that promise.

The rights of stablecoin issuers and users are clearly unequal. Neither platform has provided a clear answer on whether individuals can exchange stablecoins for fiat currency at any time and place. This uncertainty will undoubtedly increase user risk and is worth close attention.