{"id":10983,"date":"2022-05-21T05:23:26","date_gmt":"2022-05-21T05:23:26","guid":{"rendered":"https:\/\/nftandcrypto-news.com\/crypto\/do-you-have-the-right-to-redeem-your-stablecoin\/"},"modified":"2022-05-21T05:23:28","modified_gmt":"2022-05-21T05:23:28","slug":"do-you-have-the-right-to-redeem-your-stablecoin","status":"publish","type":"post","link":"https:\/\/nftandcrypto-news.com\/crypto\/do-you-have-the-right-to-redeem-your-stablecoin\/","title":{"rendered":"Do you have the right to redeem your stablecoin?"},"content":{"rendered":"
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Stablecoins are often discussed with regard to their \u201cstability.\u201d It is usually questioned whether a stablecoin is sufficiently backed with money or other assets. Undoubtedly, it is a very important aspect of stablecoin value. But, does it make sense if the legal terms of a stablecoin do not give you, the stablecoin holder, the legal right to redeem that digital record on blockchain for fiat currency?<\/p>\n

This article aims to look into the legal terms of the two largest stablecoins \u2014 Tether (USDT) by Tether and USD Coin (USDC) by Centre Consortium, established by Coinbase and Circle \u2014 to answer the question: Do they owe you anything?<\/p>\n

Related: <\/em><\/strong>Stablecoins will have to reflect and evolve to live up to their name<\/em><\/strong><\/p>\n

Tether<\/h2>\n

Article 3 of Tether\u2019s Terms of Service explicitly states:<\/p>\n

\u201cTether reserves the right to delay the redemption or withdrawal of Tether Tokens if such delay is necessitated by the illiquidity or unavailability or loss of any Reserves held by Tether to back the Tether Tokens, and Tether reserves the right to redeem Tether Tokens by in-kind redemptions of securities and other assets held in the Reserves. Tether makes no representations or warranties about whether Tether Tokens that may be traded on the Site may be traded on the Site at any point in the future, if at all.\u201d <\/p>\n

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Let us unpack this. First, Tether may delay any claim in case of lack of liquidity, unavailability or loss of reserves. We reasonably should ask how this can even happen if they claim (in the same article) that \u201cTether Tokens are 100% backed by Tether\u2019s Reserves.\u201d The answer is found down below in the terms. USDT is \u201cvalued\u201d 1:1 but not exclusively backed with fiat currency. And as per the terms, \u201cthe composition of the Reserves used to back Tether Tokens is within the sole control and at the sole and absolute discretion of Tether.\u201d<\/p>\n

As the United States Federal Reserve Board concluded in their recent report: <\/p>\n

\u201cThey are backed by assets that may lose value or become illiquid during stress, leading to redemption risks, and lack of transparency may exacerbate those risks.\u201d<\/p><\/blockquote>\n

More interesting appears the part of Tether\u2019s terms where they reserve the right to return in-kind. It means you buy USDT for the U.S. dollars, but they can return you a bond, a stock or \u201cother assets held in the Reserves.\u201d And, who knows if these assets will be worth anything?<\/p>\n

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It should be noted that redemption from Tether is possible if you are \u201ca verified customer of Tether.\u201d Normally, crypto exchanges and other financial institutions are direct customers of Tether. End-users exchange stablecoins with their applications, not with Tether, and hence must check with legal terms that such providers cast. Nevertheless, according to Tether\u2019s FAQ, individuals can also open an account with Tether after accomplishing a Know Your Customer (KYC) check.<\/p>\n

Related: <\/em><\/strong>The United States turns its attention to stablecoin regulation<\/em><\/strong><\/p>\n

Circle USDC<\/h2>\n

Circle has much in common with its twice-as-big rival, though surprisingly, its terms are even more discouraging. They, similarly, do not promise to hold equivalent fiat reserves and back their stablecoin with \u201can equivalent amount of U.S. Dollar-denominated assets,\u201d quoted from Article 1.<\/p>\n

Promising Article 2 of their terms states that \u201cCircle commits to redeem 1 USDC for 1 USD.\u201d The bad news is that this rule applies only to Circle partners (crypto exchanges, financial institutions, etc.), which they call users Type A. End-users become customers of these partners (say, when you open an account with a crypto exchange), and there is no way for an individual to become Circles\u2019 direct user and exercise the right to redemption.<\/p>\n

In Article 13, they clarify that Circle does not guarantee that the value of 1 USDC will always equal 1 USD because \u201cCircle cannot control how third parties quote or value USDC.\u201d This means Circle does not mandate their partners to cast any specific terms to their end-users, which gives such stablecoin providers freedom in what they legally promise to their customers. Circle states they are not \u201cresponsible for any losses or other issues that may result from fluctuations in the value of USDC.\u201d<\/p>\n

Simply not equal <\/h2>\n

Both Tether\u2019s USDT and Circle\u2019s USDC are not legally equal to fiat money. Moreso, their reserves, which they claim to ensure 1:1 value, are not fully pegged to fiat. They back their digital tokens with various assets, such as securities, which can eventually decrease in value and create trouble with stablecoin liquidity. <\/p>\n

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The main question was whether an individual holding the stablecoin could 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 let an individual become their direct customer to redeem USDT. But, they leave the right to return not fiat but any asset in their reserves. In the case of Circle, they legally promise redemption but do not admit individuals to exercise this right, which leaves the customer one to one with multiple exchanges, which do not necessarily guarantee this right.<\/p>\n