There is a potential problem with the terms of service of stablecoins: users may not be able to redeem them freely

The recent UST crash has raised questions about the stability of stablecoins, the most critical of which is whether stablecoins are backed by sufficient assets. While reserves are an important measure of the stability of a stablecoin's value, it may lose its relevance if the legal provisions of the stablecoin do not give holders the right to exchange on-chain assets for fiat currency.

This article will focus on the terms of service of USDT and USDC, two of the largest stablecoins by market capitalization, and the results may come as a surprise.

! Dig deeper into the USDT and USDC Terms of Service: You may not have the right to redeem your stablecoin

Tether, the issuer of USDT, stipulates in its terms of service that if there is a problem such as insufficient liquidity in the reserve, it can be redeemed or withdrawn delayed, and even redeemed in kind with assets such as securities in the reserve. This means that even if you buy USDT with USD, you may not be able to redeem the equivalent USD.

What's more noteworthy is that only "verified Tether customers" are eligible to redeem stablecoins directly from Tether. Generally, users need to exchange through exchanges and other institutions, or complete the KYC process to become direct customers of Tether.

Circle, the issuer of USDC, has more stringent terms. Circle has made it clear that it does not commit to holding an equivalent amount of fiat currency reserves as USDC, but is backed by an equivalent amount of USD-denominated assets. While Circle promises that 1 USDC can be exchanged for 1 USD, this is only available to institutional partners, and individual users cannot exercise the right of redemption directly.

Circle also stated that it does not guarantee that 1 USDC will always be equal to 1 US dollar, as it has no control over how third parties quote USDC. This means that Circle does not force its partners to offer specific terms to end users and is not responsible for losses caused by fluctuations in the value of USDC.

! Dig deeper into the USDT and USDC Terms of Service: You may not have the right to redeem your stablecoin

From a legal point of view, neither USDT nor USDC is equivalent to fiat currencies. The reserves they claim are not fully pegged to fiat currencies, but contain a variety of assets that can depreciate. Currently, users may not be able to force the exchange of stablecoins for fiat currency through legal means.

In the case of Tether, while individuals can become direct customers, Tether reserves the right not to redeem fiat currency. In the case of Circle, while the promise allows for the redemption of fiat currency, it does not recognize the right of individuals to exercise that commitment.

In general, there is an asymmetry in the rights of stablecoin issuers and users. Whether individual users can exchange stablecoins for fiat currencies at any time, Tether and Circle have not given a clear answer. This potential redemption limit may pose a risk to stablecoin holders and is worth keeping an eye on.

! Dig deeper into the USDT and USDC Terms of Service: You may not have the right to redeem your stablecoin