“Not Guaranteed For $1”: Is USDC Next To Fail?

In a recent post on X (fka Twitter) by crypto pundit @RhoRider, he shared a controversial revelation regarding the popular stablecoin USDC (USD Coin). The post exposed concerning clauses in the terms of service for both Coinbase and Circle, raising significant doubts about the stability and reliability of USDC.

USDC Not Guaranteed for $1 Redemption for Retail Customers

The post began with a warning in the form of a red flag emoji, alerting the crypto community to the potential risks associated with USDC. @RhoRider asserted that USDC is not guaranteed to be redeemable for $1 USD, as many in the cryptocurrency world have come to believe.

According to the X user, both Coinbase and Circle, the organizations behind USDC, have incorporated clauses in their terms of service that relieve them of any obligation to redeem USDC for $1 USD. Circle’s guarantee for redemption only extends to Circle account holders, while they have barred retail customers from holding such accounts.

“You are the owner of the balance of your USDC Wallet. Coinbase is not the issuer of USDC, does not hold reserves for USDC, and has no obligation to repurchase your USDC for USD. You can redeem your USDC with Circle, and Coinbase may also elect to repurchase your USDC in exchange for USD,” Circle’s terms and conditions state.

“Circle does not guarantee that the value of one (1) USDC will always equal 1 USD ($1) on other platforms,” said the firm’s terms related to its disclaimer about having no guarantees of price stability.

Furthermore, the terms also stipulate that Coinbase and Circle possess the authority to confiscate the USD backing any USDC at their discretion. This means that, in certain scenarios, the organizations could declare USDC holdings ineligible for redemption and seize the cash.

“You understand that any violation of these Terms may result in potential consequences, including the possible loss or forfeiture of USD tokenized for USDC,” the terms also said.

Potential Scenarios of Concern

@RhoRider pointed out several hypothetical scenarios that could lead to the loss of USDC value. For instance, if Coinbase were to be sanctioned by the US government for Anti-Money Laundering (AML) or Know Your Customer (KYC) violations, Circle, as the mint/redeem account holder, could declare all USDC on their platform ineligible for redemption and seize the associated cash.

Additionally, if USDC had been used in transactions involving flagged wallets, Coinbase and Circle could confiscate the USD, leaving holders with worthless tokens.

“Circle, Coinbase and any other exchange can choose to consider your USDC completely worthless,” the X user added.

Users’ Rights to Redemption Appear to Be Limited

The most concerning aspect of the post is that, based on the terms of service for Coinbase and Circle, USDC holders seemingly have no inherent rights to redeem their tokens for cash. If either of these organizations found themselves in an illiquid position, they could choose not to purchase redemptions, potentially rendering the USDC worthless.

When a commenter brought up the interpretation that Circle’s terms only means that the government authorities are the ones who can take the stablecoin and not the crypto platform, @RhoRider clarified that “the list of actionable offenses are extremely broad in a manner that could cover the entirety of crypto, and just about every transaction.”

Information for this briefing was found via the sources mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

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