Discussions on stablecoins frequently center on their “stability.” Whether a stablecoin is appropriately backed by cash or other assets, it is without a doubt a crucial factor in stablecoin value. But does it make sense if the provisions of a stablecoin prohibit the stablecoin holder from legally exchanging that blockchain-based digital record for fiat money?

To determine whether they owe you anything, this article will examine the legal agreements for the two biggest stablecoins, Tether (USDT) by Tether and USD Coin (USDC) by Centre Consortium, both of which were created by Coinbase and Circle.

Tether

“Tether reserves the right to postpone the redemption or withdrawal of Tether Tokens if such a postponement is required by the illiquidity, unavailability, or loss of any Reserves held by Tether to back the Tether Tokens. Tether also reserves the right to redeem Tether Tokens through the in-kind redemption of securities and other assets held in the Reserves. Regarding whether or not Tether Tokens that may be exchanged on the site may do so in the future, if at all, Tether offers no guarantees or assurances in this regard.

Let’s examine this. First, Tether maintains the right to postpone any claim in the event of liquidity, availability, or reserve loss. We have a right to wonder how this could even be possible, given that they assert (in the same post) that “Tether Tokens are 100% backed by Tether’s Reserves.” The terms further down contain the solution. USDT is backed partly by fiat money, although it is “priced” 1:1. The Reserves that back Tether Tokens are made up of the following at the sole authority and discretion of Tether, according to the agreements.

Do you have the right to redeem your stablecoin? https://t.co/WWGGTV2QFd #USDCoin #Tether #Stablecoin #Dollar | @cointelegraph

— Andrew Wang | Financial Advisor (@RunnymedeCap) May 21, 2022

According to the current report’s conclusion of the US Federal Reserve Board:

They are backed by assets that could depreciate or become less liquid under pressure, increasing the risk of redemption. Lack of transparency could make this risk even worse.

The section in Tether’s rules where they reserve the right to return in-kind appears to be more intriguing. In other words, you purchase USDT in exchange for US dollars, but you may receive a bond, stock, or “other assets held in the Reserves” in return. Who knows how much these assets will be worth?

It should be mentioned that if you are “a verified customer of Tether,” you may redeem from Tether. Typically, Tether’s direct clients are cryptocurrency exchanges and other financial organizations. Users must review these providers’ legal conditions because they exchange stablecoins with their applications, not Tether. However, according to the FAQ for Tether, anyone can also register a Tether account after completing a Know Your Customer (KYC) check.

Round USDC

Although Circle and its twice-as-large competition share many similarities, it is surprising that Circle’s rules are much more unwelcoming. Their stablecoin is not backed by “an equivalent number of U.S. Dollar-denominated assets,” as stated in Article 1, and they also do not commit to keeping corresponding fiat reserves.

In the enticing Article 2 of their agreements, Circle promises to exchange  USDC equal to USD. The bad news is that only Circle partners are subject to this requirement or what they refer to as Type A users (crypto exchanges, financial institutions, etc.). There is no method for a person to use Circles directly and exercise their entitlement to redemption; instead, end users become clients of these partners (for example, when you register an account with a cryptocurrency exchange).

Because “Circle cannot regulate how third parties quote or value USDC,” they make it clear in Article 13 that Circle does not guarantee that the value of 1 USDC will always be equal to 1 USD. “Any losses or other concerns that may occur from variations in the value of USDC,” according to Circle, are not their responsibility. This means that stablecoin suppliers have leeway in what they can legally ensure to their consumers because Circle does not need its partners to cast any specific terms to their end-users.

Also, read – The Top Five Algorithmic Stablecoins

Just not equal

Neither Circle’s USDC nor Tether’s USDT is equivalent to fiat money. They also admit that their reserves, which they say guarantee 1:1 value, are not entirely tied to fiat. They provide various assets, such as securities, to back their digital tokens. However, these assets may eventually lose value and cause issues with stablecoin liquidity.

The biggest concern was whether a stablecoin holder could exchange it for money. The short answer is that the customer cannot exercise such a right through legal channels, such as by filing a lawsuit. In the instance of Tether, they permitted a person to exchange USDT for Tether directly. However, they retain the option to refund any asset in their reserves, not just money. In the instance of Circle, they ostensibly promise redemption but do not allow people to exercise it, leaving the client with several exchanges that may or may not guarantee this privilege.