In-depth Discussion on the Terms and Conditions of USDT and USDC: Doubts About Stablecoin Redemption Rights

The recent UST crash has caused a huge impact on the cryptocurrency industry, raising questions about the "stability" of stablecoins. The most concerning issue is whether stablecoins have sufficient fiat currency and asset backing.

Reserves are an important indicator of measuring the anchored value of stablecoins. However, if the legal terms of the stablecoin do not grant holders the legal right to convert on-chain assets into fiat currency, does this indicator still hold practical 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 surprise many.

USDT stablecoin

Article 3 of the USDT Terms of Service states that if there are issues with insufficient liquidity, unavailability, or loss of reserves, it may result in delays in redemption or withdrawal. Additionally, the terms also reserve the right to redeem through physical assets.

This clause has raised some questions: If USDT is truly 100% backed by reserves as claimed, why is there still a need for delayed redemptions? The answer may be hidden in other clauses.

USDT claims to be pegged to the US dollar at a 1:1 ratio, but it is not fully backed by fiat currency. The terms explicitly state that the composition of reserves is determined by the issuer.

In fact, the recent assessment report from the Federal Reserve pointed out that the supporting assets of USDT may depreciate or lack liquidity under pressure, leading to the risk of a run.

It is worth noting that the terms reserve the right of "physical return." This means that even if USDT is purchased with USD, the issuer may return bonds, stocks, or other assets instead of USD.

In addition, only "verified customers" are eligible to directly redeem USDT. Generally, this refers to exchanges and financial institutions, rather than ordinary users. However, individual users can also become "direct customers" and gain redemption rights after completing the KYC process.

USDC stablecoin

The redemption terms of USDC are similar to those of USDT, but are stricter in certain aspects. The first clause clearly states that the issuer does not commit to holding a reserve of fiat currency equivalent to the amount of USDC, but instead supports it with assets valued in equivalent USD.

Although Article 2 of the terms promises "1 USDC for 1 USD", this only applies to the issuer's partners, known as "Class A users". Individual users cannot become "direct users" and exercise redemption rights, but can only indirectly hold USDC through partners (such as exchanges).

What is more concerning is that Article 13 clearly states that the issuer does not guarantee that 1 USDC will always equal 1 USD, as they cannot control how third parties price USDC. This means that the issuer will not enforce specific terms for their partners to provide to end users, nor will they be responsible for potential losses resulting from fluctuations in the value of USDC.

Summary: Unequal Rights

From a legal perspective, both USDT and USDC are not equivalent to fiat currency. Their claimed 1:1 value reserves are not entirely linked to fiat currency, but rather include various assets that may depreciate.

In short, users may currently not have the right to freely exchange stablecoins through legal means. For USDT, although individuals can become direct clients, the issuer reserves the right not to redeem fiat currency. For USDC, although there is a commitment to allow redemption of fiat currency, individuals are not recognized as having the right to exercise that commitment.

The rights of stablecoin issuers and users are clearly unequal. Can individuals exchange stablecoins for fiat currency anytime and anywhere? At least the issuers of USDT and USDC have not provided a clear answer.