Clarifying the Definition of “Stablecoin”: A Critical Discussion

This article emphasizes the importance of maintaining a clear and precise definition of "stablecoin" in the evolving cryptocurrency landscape. The confusion surrounding the term can lead to misinterpretation, risking consumer trust and market stability. It stresses the need for clarity surrounding different types of tokens often labeled as stablecoins and how this affects both users and the industry at large.

Key Takeaways

The term "stablecoin" should have a specific definition to avoid confusion among users and policymakers.
Not all tokens labeled as stablecoins are the same; they fall into different categories with varying risks.
Clear definitions protect consumers and support trust in the financial system.
Users should ask specific questions before engaging with any stablecoin to assess its legitimacy and safety.
Rating agencies are beginning to evaluate stablecoins, but regulatory standards are needed for long-term solutions.

While protecting the integrity of the term “stablecoin” may seem pedantic, it is a foundational step in establishing trust, clarity, and transparency

Understanding the Risks of Mislabeling Stablecoins

When Stream Finance's XUSD token lost its $1 peg in November 2025, dropping as low as $0.43 due to stress on its backing assets, a wave of distressing headlines emerged. The media quickly labeled this as another instance of "stablecoin depegging," which caused significant confusion regarding the reliability of digital payments.

Many analysts viewed XUSD's fall as a sign of systemic risk affecting the broader stablecoin market, which alarmed a mainstream audience that is still cautious about adopting digital payment methods. However, it's crucial to note that XUSD does not match the conventional definition of a stablecoin as understood by most experts, meaning the issues that led to its decline do not pertain to fully reserved and transparently backed payment tokens.

As stablecoins increasingly reach mainstream users, the industry must clearly define what a stablecoin truly is—and what it isn’t. The term now plays a vital role in payment infrastructure, settlement systems, and cross-border commerce. Therefore, it cannot be allowed to devolve into vague marketing jargon. Just like the terms "security" and "commodity," which have precise definitions and implications, “stablecoin” needs to be a rigorously maintained and enforced category. This clarity is essential for consumers, merchants, and policymakers to understand the inherent protections and tradeoffs.

Are All Stablecoins Created Equal?

Many individuals mistakenly believe that any token labeled a stablecoin is simply a digital token pegged to one dollar or one euro. However, these instruments differ significantly in structure, solvency risk, and user protections. Treating them all as the same leads to confusion and unnecessary fears.

Products marketed as “stablecoins” typically fall into four categories:

Fully Backed Stablecoins: Assets are held in reserve, typically on a 1:1 basis.
Fractionally Backed Stablecoins: These have some reserves, but not enough to fully cover all tokens outstanding.
Algorithmic Stablecoins: Their value is maintained through algorithms and market incentives rather than reserves.
Synthetic Stablecoins: These are derivatives that attempt to mimic the price of a stable asset.

Only the first category can rightfully bear the title “stablecoin.” While the others may serve useful purposes, they represent distinctly different financial products and carry different risks for investors. Failing to differentiate between these categories turns isolated failures into alarmist headlines about systemic instability.

The Risks of Loose Definitions

Financial markets require clear definitions to establish trust, oversight, and healthy competition. The terms "security" and "commodity" imply specific protections, disclosures, and supervisory obligations. Regulatory bodies step in when companies blur these lines, as clarity benefits both markets and consumers.

Stablecoins are deserving of similar clarity. They serve various functions, including settlements, corporate treasury management, and consumer payment tools. Their ability to flow across borders, support payroll functions, and serve as anchors for new financial applications mean that the label "stablecoin" must come with standardized expectations surrounding asset quality, redemption processes, reserve management, and disclosures. Without precise terminology, markets risk misrepresentation, putting consumers at unnecessary risk.

A lack of well-defined categories can lead to repeated cycles of consumer harm. The word “stable” may lead people to erroneously assume that a product is as safe as cash. However, attaching this label to synthetic or algorithmic constructs obscures the reality that these instruments can behave differently in times of stress. Users unable to distinguish between these can incur losses that clearer labeling might have prevented. Each incident tarnishes the reputation of the entire category, including fully reserved tokens that continue to function effectively.

Mislabeling also creates reputational risk. When synthetic products fail, reports label them as stablecoin failures, even though their structure differs completely from cash-backed tokens. This misunderstanding hampers the adoption of reliable payment solutions and forces merchants to spend time and resources verifying which tokens will perform as expected.

For merchants, the cost is significant. Businesses require predictable settlement and redemption processes. Vague labeling introduces counterparty and liquidity risks, discouraging merchants from accepting digital payments or integrating them into their operations.

Over time, the absence of crisp definitions raises compliance costs for responsible players while enabling opportunistic issuers to take advantage of the ambiguities.

Being Vigilant Until Regulatory Action is Taken

As the industry awaits more consistent guidance, merchants and consumers can safeguard themselves by asking three vital questions before using any stablecoin:

What backs the token? Users should be clear on whether it is cash, Treasury-backed, bank deposits, or a synthetic product. If a token isn’t underpinned by 1:1 cash and treasury assets, it might fail to maintain its peg during stressful conditions.
Is the token redeemable for fiat on demand, and how quickly? The speed and conditions of redemption determine whether the token can function like cash; any delays or restrictions indicate that it behaves more like a financial product.
Where are the reserves stored, how frequently are they audited, and by whom? Clear custody reports and regular independent attestations confirm that reserves are in place, accessible, and managed with credible oversight.

Obtaining clear answers to these inquiries can help differentiate genuine payment stablecoins from products that might only share a name. Until regulatory measures are established, it’s crucial for everyday users to remain watchful.

Traditional rating agencies, like S&P, have begun evaluating stablecoins based on their ability to maintain their pegs, providing users and merchants with valuable insights regarding the risk associated with specific products. Early findings highlight the urgent need for such analyses; S&P recently downgraded Tether, the world’s largest stablecoin by market cap, to the lowest possible rating.

While these rating agencies are delivering much-needed clarity for consumers, they can only audit a limited number of tokens at any given time, resulting in reports covering only a tiny fraction of the stablecoins available in the market. In the long run, it is essential for regulators to take on the responsibility of helping merchants and consumers identify risks. Streamlined regulatory standards will not only make stablecoins more fungible but also spare consumers and merchants the hassle of conducting credit checks each time they wish to perform a transaction.

While maintaining the integrity of the term “stablecoin” might seem a trivial pursuit, it is essential for fostering the trust, clarity, and transparency necessary to support stablecoin commerce at scale.