It's Time to Get Serious About Stablecoin Definitions

It's Time to Get Serious About Stablecoin Definitions | Opinion

The term “stablecoin” is critical in the world of digital payments, but its meaning is often misused. When the XUSD token lost its $1 peg, it led to widespread panic, highlighting the need for clear definitions within this category. Not all tokens labeled as stablecoins provide the same level of safety or reliability, and it is vital for both consumers and regulators to understand these differences to build trust and mitigate risks.

Key Takeaways

The collapse of the XUSD token has sparked confusion about stablecoins and their safety.
Stablecoins vary significantly in structure, risk, and protections; not all should be categorized as "stablecoins."
Clear definitions are essential to prevent consumer confusion and promote market integrity.
Users should ask critical questions to evaluate stablecoins before use.
Regulatory frameworks are needed for better stability and trust in the stablecoin market.

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

Understanding Stablecoins and Their Varied Impacts

When Stream Finance’s XUSD token fell below its $1 peg in November 2025, dropping as low as $0.43 amid backing asset stress, it ignited a flurry of startling headlines. Media outlets described this incident as yet another “stablecoin depegging,” generating uncertainty around the safety of digital payments. Numerous commentators interpreted the XUSD failure as evidence of systemic risk within the larger stablecoin ecosystem, scaring a public still apprehensive about digital transactions. However, this narrative neglects a crucial point — XUSD does not meet the criteria that most experts agree defines a stablecoin, and the issues that led to its decline do not pertain to fully reserved, transparently backed payment tokens.

As stablecoins are used by mainstream audiences, the industry must clearly explain what constitutes a stablecoin and, just as importantly, what does not. The term has become a central element in payment infrastructure, settlement systems, and international commerce. It is vital to refrain from allowing it to devolve into ambiguous marketing terminology. Much like terms such as “security” and “commodity,” which have specific definitions and associated rights and risks, “stablecoin” should be a well-defined and distinctly regulated category. Without this clarity, consumers, merchants, and regulators are likely to misinterpret the protections and trade-offs involved.

Not All Stablecoins Are Alike

Many people mistakenly believe that any token labeled as a stablecoin is simply a digital token pegged to one dollar or one euro. In reality, these instruments have significant differences in structure, solvency risk, and user protections. Viewing them as interchangeable leads to predictable misunderstandings and unwarranted fears.

Most tokens referred to as “stablecoins” can be categorized into four distinct groups:

Fully reserved stablecoins: Backed 1:1 by cash or cash equivalents.
Partially backed stablecoins: Having a mix of reserves that do not strictly adhere to the 1:1 standard.
Algorithmically stabilized tokens: Relying on market mechanisms to maintain their value.
Synthetic or unsupported tokens: Lacking true backing and existing purely as speculative instruments.

Only the fourth category legitimately qualifies for the "stablecoin" label. While the other classes might serve useful purposes, they are inherently different financial products, each posing unique risks to investors. The failure to differentiate between these categories transforms isolated incidents of failure into alarming headlines about systemic instability.

The Risks of Loosely Defined Stablecoins

The integrity of financial markets hinges upon precise definitions that foster trust, regulation, and orderly competition. Clearly defined terminology around concepts such as “security” and “commodity” outlines specific protections, disclosures, and expectations from regulators. Labeling a product as a security or commodity requires that it meets the strict criteria of those classifications. Authorities intervene whenever companies attempt to blur these lines, as clarity benefits both the market and consumers.

Stablecoins warrant similar treatment. They now serve as essential tools for settling transactions, managing corporate finances, and facilitating consumer payments. They engage in cross-border transactions, support payroll systems, and anchor various financial applications. Labels associated with stablecoins should come with standardized expectations regarding asset quality, redemption protocols, reserve management, and disclosures. In the absence of clear terms, markets are left vulnerable to misrepresentation, exposing consumers to unnecessary risks.

A vague definition leads to repeated instances of consumer harm. The word “stable” might suggest the safety of a cash-equivalent asset. However, when this term is assigned to synthetic or algorithmically controlled instruments, it obscures the fact that these products react differently under pressure. Users who misinterpret one type for another could incur losses that clear labeling could have prevented. Each occurrence damages the trust in the overall category, affecting even the fully reserved tokens that function as intended.

Mislabeling carries the risk of reputational damage. When synthetic products fail, they are often described in media as stablecoin failures, despite lacking any fundamental resemblance to cash-backed tokens. This miscommunication impedes the adoption of reliable payment solutions and compels businesses to spend time and resources verifying which tokens are trustworthy.

Over time, ambiguous classifications increase compliance costs for responsible institutions while encouraging opportunistic issuers to take advantage of the blurry definitions.

Staying Informed Until Regulatory Clarity Arrives

As the industry awaits consistent regulatory guidance, both merchants and consumers can safeguard themselves by considering three essential questions before using any stablecoin.

What is backing the token? It's crucial to differentiate between cash and treasury backing, bank deposits, and synthetic structures. If a token isn't supported by 1:1 cash reserves, it may fail to maintain its peg during market stress.
Can the token be redeemed for fiat currency on demand, and how quickly? The speed of redemption impacts whether the token behaves like currency; any delays or restrictions imply it operates more like a financial asset.
Where are the reserves held, how often are they audited, and by whom? Transparency regarding custody and regular independent audits ensure that reserves are confirmed, accessible, and managed under credible oversight.

Clear answers to these fundamental questions separate genuine payment stablecoins from others that may share the name but not the characteristics. Until regulators provide definitive guidelines, it remains essential for everyday users to be aware and cautious.

Traditional rating agencies, like S&P, have begun assessing stablecoins based on their capacity to maintain their pegs. This evaluation gives users and merchants a vital signal regarding the risk associated with particular products. Recent reports indicate a pressing need for this type of analysis: S&P recently downgraded Tether, the world’s largest token labeled as a stablecoin, to the lowest possible rating.

While ratings agencies offer valuable insights for consumers, their capabilities are limited, auditing only a small number of tokens at a time and producing reports for a tiny fraction of the available stablecoins in the market. In the long run, it is critical for regulators to alleviate the burden on merchants and consumers to discern risks independently. More transparent regulatory standards will also promote fungibility in stablecoins, sparing consumers and businesses from the hassle of credit assessments before each stablecoin transaction.

While it may seem like a minor detail, maintaining the integrity of the term “stablecoin” is a vital step toward establishing the trust, clarity, and transparency essential for scaling stablecoin commerce.