Legal Risks of Stablecoins: Analysis of USDT and USDC Terms

The recent UST crash has raised concerns about the stability of stablecoins, particularly regarding whether stablecoins have enough fiat currency and other assets backing them. Reserves are an important indicator of the value anchoring of stablecoins, but if the legal terms of the stablecoin do not grant holders the legal right to convert on-chain assets into fiat currency, the significance of this indicator is questionable.

This article will focus on analyzing the terms of service for the two largest stablecoins, USDT and USDC, and the results may be surprising.

USDT Stablecoin Terms Analysis

The third clause of the USDT Terms of Service states that if there is a liquidity shortage, unavailability, or loss of reserves, Tether has the right to delay the redemption or withdrawal of USDT, and also retains the right to redeem through physical assets. This raises a question: if USDT is truly 100% backed by reserves, why is there still a need to delay redemption?

In fact, Tether claims that USDT is "valued" at a 1:1 peg to the US dollar, but it is not fully backed by fiat currency. The composition of the reserves is determined by Tether itself. The Federal Reserve's assessment report indicates that Tether's supporting assets may depreciate or lack liquidity under pressure, posing a risk of a bank run.

It is worth noting that Tether retains the right of "physical redemption"; even if users purchase USDT with USD, Tether can return other assets from the reserves instead of USD.

Only "verified Tether customers" can directly redeem stablecoins from Tether. Generally, Tether's direct customers are exchanges and financial institutions, and end users need to exchange through these "direct customers". Individual users can become "direct customers" of Tether and obtain redemption rights after completing the KYC process.

Analysis of USDC Stablecoin Terms

Circle's USDC redemption terms are similar to those of USDT, but more stringent. The USDC service terms clearly state that Circle does not commit to holding a reserve of fiat currency equal to the amount of USDC, but rather supports it with dollar-denominated assets of equal value.

Although Circle "promises to exchange 1 USDC for 1 USD", this only applies to its partner (, known as "Class A users" ). Individual users cannot become Circle's "direct users" to exercise redemption rights and can only become customers of Circle's partners.

Moreover, the USDC terms of service clearly state that "Circle does not guarantee that 1 USDC will always be equal to 1 USD" and is not responsible for any losses due to fluctuations in the value of USDC.

Inequality of Rights Between Stablecoin Issuers and Users

From a legal perspective, USDT and USDC are not equivalent to fiat currency. The claimed 1:1 value reserves are not entirely pegged to fiat currency but rather include various assets that may depreciate.

Currently, users may not be able to exercise the right to freely exchange stablecoins through legal means. For Tether, although individuals can become direct clients, Tether reserves the right not to redeem fiat currency. For Circle, while it promises to allow the redemption of fiat currency, it does not acknowledge that individuals have the right to exercise that promise.

The rights of stablecoin issuers and users are clearly unequal. Tether and Circle have not provided a clear answer on whether individual users can exchange back to fiat currency at any time and place. This uncertainty highlights the potential legal risks in the stablecoin market, requiring the attention of regulators and users.