Thread by @jchervinsky

1/ Great question.

The short answer (not legal advice) is the money probably gets bailed-in just like other deposits at the failed bank & no special dynamics protect stablecoin holders, afaik.

The longer answer requires looking at the relationships between all the parties . . .

2/ First, you have the stablecoin issuer & the bank custodying its reserve; is there anything special here to protect against a bail-in?

Second, you have the stablecoin issuer & the stablecoin holders; is there anything special here to give holders recourse in case of a bail-in?

3/ The best place I can think of to look for insight on these questions is in the terms, conditions, & disclosures of the issuers' whitepapers, user agreements, & attestations (links at end of thread).

4/ The issuers' user agreements say dollars are:

- "held by Circle with its U.S. banking partners in segregated accounts, on behalf of, and for the benefit of, Users" (USDC)

- "deposited either in US insured depository banks or used to purchase US treasury bonds" (PAX)

5/ There's no way to be sure without seeing the contracts between the issuers & their banks, but these don't sound like special relationships conveying unusual privileges or protections.

If that's true, then issuers could be treated like any other depositor in case of a bail-in.

6/ The issuers' user agreements seem to recognize this fact by transferring the risk of a bank failure & bail-in to the stablecoin holders.

Both outline risk factors & disclosures acknowledging (in varying degrees of detail & precision) the chance of loss due to bank failures.

7/ For example, both disclose:

- lack of deposit insurance
- risk of legislative or regulatory changes affecting value

And PAX explicitly says:

- "Any bond or trust account we may hold for the benefit of members may not be sufficient to cover all losses incurred by members."

8/ Both also have provisions to protect them against claims by holders (& others) in case of loss:

- disclaimers of express & implied warranties
- limitation of liability clauses
- force majeure clauses

Plus the usual boilerplate on indemnification, release, arbitration, etc.

9/ Perhaps most on-point is PAX's force majeure clause.

It explicitly says PAX will not "be liable for our failure to perform any obligations under this Agreement due to events beyond our control" including "bank failures[.]"

So, there's that.

10/ To be fair, it would be good legal practice for the issuers to limit liability this way even if they do have protection against bail-ins.

But they're clearly not making any promises of protection like that, & they're armed & ready to leave holders with the bag if it happens.

11/ All this depends on commercial & political considerations too.

Maybe banks or policymakers find ways to protect issuers if failing to do so has business or systemic risks.

But then issuers might be "too big to fail," opening them up to extraordinary new regulatory burdens.

12/ It also depends on the nightmare of litigation & dispute resolution that would result from a bail-in.

It's impossible to predict whether the issuers might still have valid claims against the banks, or the holders against the issuers, or both against third parties, etc.

13/ But in short (& not meant as legal advice) I think it's fair to assume stablecoin holders bear the risk of loss in case of bank failures & bail-ins.

Whether stablecoin value would actually fall is another issue. After all, USDT was 74% backed by dollars & has done just fine.

14/ Links:

USDC Whitepaper: centre.io/pdfs/centre-wh…
USDC User Agreement: support.usdc.circle.com/hc/en-us/artic…
USDC Attestations: centre.io/usdc-transpare…

PAX Whitepaper: paxos.com/wp-content/upl…
PAX Terms & Conditions: paxos.com/general-terms-…
PAX Attestations: paxos.com/attestations/

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