Stop Mislabeling Everything as “Stablecoin”

In November 2025, Stream Finance’s XUSD token lost its dollar peg, dipping to a low of $0.43 due to issues concerning the assets backing the token. This event triggered a flurry of alarming headlines, with many media outlets claiming it was another instance of a “stablecoin depegging.” Such reports generated confusion surrounding the safety of digital payment methods.

Key Takeaways

The term “stablecoin” needs precise definitions to prevent confusion and establish trust in digital payments.
Many tokens labeled as stablecoins have different structures and risks; only fully reserved stablecoins should carry the stablecoin label.
Clear definitions are essential for preventing consumer harm and misunderstanding of products.
Users should conduct due diligence by asking specific questions about token backing, redemption, and reserve management.
Regulatory clarity is crucial, as it would simplify the stablecoin landscape for consumers and merchants.

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

Commentators equated XUSD’s downfall with broader systemic risks in the stablecoin market, unsettling an already cautious public. However, it’s crucial to recognize that XUSD doesn’t meet the standard definition of a stablecoin, and its issues are not indicative of fully reserved, transparently backed payment tokens.

As stablecoins evolve and attract mainstream users, the industry must provide clear explanations of what constitutes a stablecoin and what does not. The term has become central to payment infrastructures, cross-border commerce, and settlement systems. To avoid ambiguity, “stablecoin” needs to be defined clearly, similar to how terms like “security” and “commodity” signal distinct rights and risks. Without such clarity, consumers, merchants, and policymakers are prone to misunderstand the safeguards and risks involved.

Are All Stablecoins Created Equal?

Many people mistakenly believe that any token branded as a stablecoin is simply a digital token pegged to one dollar or euro. However, these instruments have different structures, solvency risks, and protections for users. Treating them as the same can lead to confusion and unnecessary anxiety.

Most products identified as “stablecoins” can be categorized into four groups:

Fully Reserved Stablecoins: Backed 1:1 by cash or equivalents.
Fractionally Reserved Stablecoins: Backed by a mix of cash and other assets.
Algorithmic Stablecoins: Maintain stability through algorithms and market mechanisms.
Synthetic Stablecoins: Structured to mimic price stability without proper backing.

Only the fourth category should appropriately be called a “stablecoin.” While the others may have valid use cases, they are fundamentally different financial instruments, carrying unique risks for investors. Failing to differentiate among these categories can turn isolated failures into alarming headlines about systemic instability.

The Risks of a Vaguely Defined “Stablecoin” Category

Financial markets depend on clear definitions to foster trust, oversight, and healthy competition. Terms like “security” and “commodity” provide specific protections and expectations for disclosure. Issuers cannot label their products as securities or commodities unless they meet defined criteria. Regulators step in when firms attempt to blur these lines, as clarity safeguards both markets and consumers.

Stablecoins warrant the same careful treatment. They play vital roles as settlement mechanisms, corporate treasury instruments, and consumer payment options. They facilitate cross-border transactions, payroll processes, and innovative financial applications. The label “stablecoin” should convey standardized expectations about asset quality, redemption processes, reserve management, and disclosures. Without clear terminology, the market becomes susceptible to misrepresentation, exposing consumers to unnecessary risks.

A loosely defined category leads to repeated cycles of consumer harm. When people hear “stable,” they often assume it resembles the safety of cash-like instruments. Labeling synthetic or algorithmic products as stablecoins obscures their unique risk behaviors in times of stress. Users who mistake one for another may confront unexpected losses that could have been averted with more precise terminology. Each misstep undermines trust in the entire category, including those fully reserved tokens operating as intended.

Mislabeling also generates reputational damage. When synthetic products fail, headlines often frame them as stablecoin collapses, even though they differ significantly from cash-backed tokens. This misconception hinders the adoption of reliable payment solutions and forces businesses to expend resources validating the dependable tokens.

Moreover, merchants depend on predictable settlement procedures and redemption options. Ambiguous labels introduce counterparty and liquidity risks that can deter businesses from accepting digital payments or adopting them in their operations.

Over time, a lack of distinct categories raises compliance costs for responsible entities while allowing opportunistic issuers to take advantage of the ambiguity.

Staying Alert Until Regulatory Guidance is Established

While awaiting more consistent regulations, merchants and consumers should ask three key questions before using any stablecoin:

What backs the token? Users need to distinguish between cash and Treasury backing, bank deposits, or synthetic designs. If a token isn’t backed by 1:1 cash and Treasury reserves, it may not maintain its peg in significant market stress.
Is the token redeemable for fiat on demand and with what speed? Redemption speed is critical to whether the token operates like cash. Delays or restrictions suggest it functions more like a financial product.
Where are the reserves held, and how often are they independently verified? Clear custody and regular attestations ensure that reserves exist, are accessible, and managed under rigorous oversight.

Accurate answers to these questions help users distinguish true payment stablecoins from products that may merely resemble them. Until regulatory standards are enforced, it’s essential for everyday users to remain vigilant.

Traditional rating agencies, such as S&P, have begun evaluating stablecoins based on their ability to maintain their dollar peg, providing users and merchants with valuable insights into product risks. Their recent actions underscore the urgent need for such analysis: S&P recently downgraded Tether, the world’s largest stablecoin, to the lowest possible rating.

Although rating agencies are providing clarity for consumers, they currently focus on a limited number of tokens, covering only a tiny fraction of the stablecoins available in the market. In the long run, regulators must alleviate the burden on merchants and consumers to identify risks individually. Clearer regulatory standards will also enhance the fungibility of stablecoins, making transactions easier and reducing the hassle of credit checks for stablecoin transactions.

While it may seem overly technical to protect the term “stablecoin,” doing so is a critical step in building the trust, clarity, and transparency necessary for stablecoin commerce to thrive at scale.