aUSDT and the Risk Behind Stablecoins

Did you know that USDT is not the only dollar stablecoin issued by Tether?

You may have heard of USAT, the stablecoin Tether launched for the US market, with verifiable reserves and audits based on US standards. But there is another one too: aUSDT, a stablecoin backed by tokenized gold, XAUT. Or rather, at this point, it is probably more accurate to say there was another one.

A few days ago, Tether announced that it is winding down Alloy by Tether, the program under which aUSDT was issued. New aUSDT tokens are no longer being minted, and existing tokens must be redeemed within three months.

And this is where things get interesting.

Redemption has to follow the rules set out in the Alloy by Tether Terms of Use. Those terms were accepted by the users who originally minted these stablecoins - but not necessarily by the people holding them today. After all, the tokens circulate freely on-chain. They could easily have changed hands multiple times and ended up with someone who has no direct relationship with Tether at all.

Now those holders will have to go through verification in a hurry. Tether's verification process is neither quick nor free, and it requires documents that not everyone can provide. On top of that, there is a fee for redeeming the tokens. Was this really what someone expected when they simply accepted aUSDT as payment?

Tether says that holders who fail to redeem their tokens within the required timeframe will no longer be able to receive the XAUT tokens backing aUSDT through the Alloy by Tether platform.

I think anyone who uses stablecoins should pay attention to this story. It is a reminder that stablecoin holders can face another kind of risk - one that almost nobody usually talks about.

The good news is that some stablecoins are designed so that redemption does not depend on a centralized issuer agreeing to honor it. Users of rabbit.io have access to two such stablecoins: DAI and Liquity USD.