Stablecoins are often discussed regarding their “stability”. It is often questioned whether a stablecoin is sufficiently backed by money or other assets. It is certainly a very important aspect of the value of the stablecoin. But does it make sense if the legal terms of a stablecoin don’t give you, the stablecoin holder, the legal right to redeem that digital record on the blockchain for fiat currency?
This article aims to analyze the legal terms of the two largest stablecoins – Tether (USDT) by Tether and USD Coin (USDC) by Center Consortium, established by Coinbase and Circle – to answer the question: Do they owe anything?
Tether
Article 3 of the Tether Terms of Service explicitly states:
“Tether reserves the right to delay the redemption or withdrawal of Tether Tokens if such delay is necessitated by illiquidity or unavailability or loss of any Reserve held by Tether to back Tether Tokens, and Tether reserves the right to redeem Tether Tokens by in-kind redemptions of securities and other assets held in Reserves Tether makes no representations or warranties as to whether Tether Tokens that may be traded on the Site may be traded on the Site at any time in the future, if is that they are.”
Let’s break this down. First of all, Tether can delay any claims in case of lack of liquidity, unavailability or loss of reserves. It is reasonable to wonder how this can happen if they state (in the same article) that “Tether tokens are 100% backed by Tether reserves.” The answer is found further down in the terms. USDT is “valued” 1:1 but is not exclusively backed by fiat currency. And according to the terms, “the composition of the Reserves used to back the Tether Tokens is under the exclusive control and in the sole and absolute discretion of Tether.”
As the US Federal Reserve Board concluded in its recent report:
“They are backed by assets that can lose value or become illiquid during stress, leading to amortization risks, and a lack of transparency can exacerbate those risks.”
More interesting seems the part of the Tether terms in which they reserve the right of return in kind. It means that you buy USDT for the US dollars, but they can return you a bond, a stock or “other assets held in reserves”. And who knows if these assets will have any value?
Please note that Tether redemption is possible if you are “a verified Tether customer”. Typically, crypto exchanges and other financial institutions are direct clients of Tether. End users trade stablecoins with their apps, not with Tether, and therefore should check the legal terms those providers issue. However, according to the Tether FAQ, individuals can also open an account with Tether after performing a know-your-customer (KYC) check.
Circle USDC
Circle has a lot in common with its twice-biggest rival, though surprisingly its terms are even more daunting. They similarly do not promise to hold equivalent fiat reserves and back their stablecoin with “an equivalent amount of US dollar-denominated assets,” according to section 1.
Promising article 2 of their terms states that “Circle agrees to redeem 1 USDC for 1 USD.” The bad news is that this rule only applies to Circle partners (crypto exchanges, financial institutions, etc.), which they call Type A users. End users become customers of these partners (for example, when they open an account on a cryptocurrency exchange), and there is no way for an individual to become a direct user of Circle and exercise the redemption right.
In Article 13, they clarify that Circle does not guarantee that the value of 1 USDC will always be equal to 1 USD because “Circle cannot control how USDC is priced or valued by third parties.” This means that Circle does not force its partners to issue any specific conditions to their end users, giving such stablecoin providers freedom in what they legally promise their customers. Circle states that they are “not responsible for any losses or other issues that may result from fluctuations in the value of USDC.”
they just aren’t the same
Both Tether USDT and Circle USDC are not legally the same as fiat money. What’s more, its reserves, which it claims guarantee a 1:1 value, are not fully tied to fiat money. They back their digital tokens with various assets, such as securities, which can end up losing value and creating problems with stablecoin liquidity.
The main question is whether an individual who owns a stablecoin can convert it to fiat. The short answer is that there is no such right that the customer can exercise through legal means, such as claiming it in court. In the case of Tether, they allow an individual to become their direct customer to redeem USDT. But, they leave the right to return not fiat but any assets in their reserves. In the case of Circle, they legally promise to exchange but do not allow individuals to exercise this right, leaving the customer one-on-one with multiple exchanges, which do not necessarily guarantee this right.
This article is for general information purposes and is not intended to be and should not be taken as legal advice.
The views, thoughts and opinions expressed herein are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Oleksii Konashevych He is a doctor of law, science and technology and director general of the Australian Institute for Digital Transformation. In his academic research, he presented a concept of a new generation of property registries that are based on a blockchain. He introduced an idea of title tokens and supported it with technical protocols for smart laws and digital authorities to enable full legal governance of digitized property rights. He has also developed a cross-chain protocol that allows the use of multiple ledgers for a blockchain property registry, which he submitted to the Australian Senate in 2021.
Investments in crypto assets are not regulated. They may not be suitable for retail investors and the full amount invested may be lost. The services or products offered are not aimed at or accessible to investors in Spain.