Stablecoins are often talked about in terms of their “stability”. It is usually asked whether stablecoin is adequately secured with money or other assets. Undoubtedly, it is a very important factor in the value of stablecoin. But does it make sense if the stablecoin legal terms give you, the stablecoin holder, no legal right to redeem this digital file on a blockchain for fiat currency?
This article aims to examine the legal terms of the two largest stabilization currencies – Tether (USDT) by Tether and USD Coin (USDC) by the Center Consortium, founded by Coinbase and Circle – to answer the question: Do they owe you anything?
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Article 3 of the Tether Terms of Service explicitly states:
“Tether reserves the right to delay the redemption or revocation of the Tether tokens if such delay is necessary due to illiquidity or unavailability or loss of any of Tether’s reserves to support the Tether tokens, and Tether reserves the right to redeem the Tether tokens. with good redemptions of securities and other assets in the reserve fund. Tether makes no representations or warranties as to whether or not any trade in Tether tokens that may be traded on the Site will be made at any time in the future, if at all. ”
Let’s take this up. First, Tether may delay any claim in the event of liquidity shortages, unavailability or loss of reserves. We should ask how this can even happen if they claim (in the same article) that “Tether Tokens are 100% supported by Tether’s Reserve.” The answer can be found below in the terms. USDT is “rated” 1: 1 but not exclusively supported by fiat currency. And as per the terms, “the composition of the reserves used to support Tether Tokens is under one control and entirely under the control of Tether.”
As the US Federal Reserve concluded in its recent report:
“They are backed by assets that can lose value or become illiquid during stress, leading to redemption risk and a lack of transparency can increase that risk.
More interesting is the part of Tether’s terms where they reserve the right to return in kind. This means that you buy USDT for US dollars, but they can return bonds, shares or other assets in the reserve fund. And who knows if these assets will be worth anything?
It should be noted that redemption from Tether is possible if you are a “Tether Certified Customer.” Typically, cryptocurrency exchanges and other financial institutions are direct customers of Tether. End users exchange stablecoins with their applications, not with Tether, and must therefore check the legal terms issued by such providers. However, according to Tether FAQs, individuals can also open an account with Tether after completing the Know Your Customer (KYC) check.
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Circle has a lot in common with its twice-larger competitor, although it is surprising that its terms are even more discouraging. At the same time, they promise not to hold the corresponding fiat reserves and back up their stablecoin with “a comparable amount of assets in US dollars,” as quoted in Article 1.
Promising Article 2 of their Terms states that “The Ring undertakes to redeem 1 USDC for 1 USD.” The bad news is that this rule only applies to Circle affiliates (cryptocurrencies, financial institutions, etc.), which they call Type A users. to become a direct user of Circles and exercise the right of redemption.
In Article 13, they explain that Circle does not guarantee that the value of 1 USDC will always be equivalent to 1 USD because “Circle cannot control how third parties quote or evaluate USDC. This means that Circle does not entrust its affiliates with imposing any special terms on its end users, giving such stablecoin providers the freedom in what they legally promise their customers. Circle says they are not “responsible for any losses or other issues that may result from fluctuations in USDC value.
Simply not equal
Both Tether’s USDT and Circle’s USDC are not legally equal fiat money. Moreso, their reserves, which they say guarantee a 1: 1 value, are not fully tied to fiat. They back up their digital tokens with various assets, such as securities, which can eventually fall in price and create problems with stablecoin liquidity.
The main question was whether a person with stablecoin could turn it into a fiat. The short answer is that there is no such right that the client can exercise legally, such as claiming it in court. In the case of Tether, they let the individual become their direct customer to redeem the USDT. But they leave the right not to return fiat but any property in their reserves. In the case of Circle, they promise redemption legally but do not allow individuals to exercise this right, which leaves the customer one on one with many exchanges, which do not necessarily guarantee this right.
This article is for general information purposes only and should not be construed as legal advice.
The views, thoughts and opinions expressed herein are the sole responsibility of the authors and do not necessarily reflect or represent the views and opinions of the Cointelegraph.
Oleksii Konashevych holds a Ph.D. in law, science and technology and is the director of the Australian Institute for Digital Transformation. In his academic research, he presented the idea of a new generation of blockchain-based asset registers. He introduced the idea of title tokens and supported it with technical protocols for smart laws and digital authorities to enable complete legal control over digital property rights. He has also developed chain protocols that allow the use of multiple ledgers for the blockchain asset register, which he presented to the Australian Senate in 2021.
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