The Importance of Defining 'Stablecoin' in the Crypto Space

The term "stablecoin" is often used inaccurately in the cryptocurrency world, leading to confusion and mistrust among consumers and merchants. This article emphasizes the need for clear definitions and guidelines around stablecoins to enhance trust, security, and transparency within the digital payment ecosystem.

Key Takeaways

The recent failure of Stream Finance’s XUSD token highlights the confusion surrounding the term "stablecoin."
Stablecoins are not all the same; they differ in structure and underlying risk.
Clear definitions and standards are crucial for protecting consumers and ensuring the integrity of the stablecoin market.
Users should conduct due diligence and ask specific questions before using any stablecoin.
Rating agencies, like S&P, have begun assessing the risk associated with stablecoins, but regulatory oversight is 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 Stablecoins and Their Categories

When Stream Finance's XUSD token lost its $1 value and dropped to $0.43 in November 2025, it resulted in a flurry of alarming news reports. Many headlines mistakenly labelled it an example of a "stablecoin depegging," which sparked confusion about the safety of digital payments. However, this situation failed to acknowledge an important point: XUSD does not meet the standard definition of a stablecoin, and its collapse does not reflect the stability offered by genuinely fully-backed tokens.

As stablecoins gain traction among mainstream users, it’s crucial for the industry to clarify what constitutes a stablecoin. This term is increasingly central to payment systems and cross-border transactions, and it must retain its precise meaning. Just as “security” and “commodity” have specific definitions with associated rights and obligations, “stablecoin” should also be a well-defined term. Failure to maintain this distinction may lead to misguided interpretations regarding the protections and risks involved.

The Misconception of Stablecoins

Many individuals mistakenly think all stablecoins are identical, merely digital tokens pegged to one U.S. dollar or one euro. In reality, these tokens vary significantly in structure, solvency risk, and the protections they offer users. Treating these different instruments as equivalents leads to confusion and unnecessary panic.

Stablecoins typically fall into four categories:

Fully reserved stablecoins: Backed by cash or cash-equivalents.
Algorithmic stablecoins: Use algorithms to manage supply and demand.
Collateralized stablecoins: Backed by other cryptocurrencies or assets.
Non-reserve stablecoins: Lacking consistent reserves.

Only the first category truly deserves the label "stablecoin." While the other categories may have legitimate use cases, they operate as distinct financial instruments with different risks. Misunderstanding these differences can cause isolated challenges to appear as widespread threats to the stability of the entire market.

The Risks of Ambiguity

Financial markets thrive on clear definitions to foster trust, oversight, and healthy competition. Terms like “security” and “commodity” come with established protections, disclosures, and expectations. Mislabeling can have significant repercussions, prompting regulatory intervention to maintain market integrity.

Stablecoins merit the same rigor. They are integral to settlement processes, corporate finance, and consumer transactions. Clear labeling of stablecoins should reflect consistent expectations regarding asset quality, redemption processes, reserve management, and necessary disclosures. Without precise definitions, markets are susceptible to misrepresentation, increasing risk for consumers.

A vague definition leads to repeated consumer harm, as individuals might perceive products with "stable" in their name as inherently safe. This misinterpretation can cause users to suffer losses that could have been avoided with clearer labels. When failures appear under the umbrella of "stablecoin," it damages the reputation of the entire category, including those that remain reliable.

The Impact on Merchants

Ambiguous terms create uncertainty in the market. Businesses rely on predictable transactions, and unclear definitions result in counterparty risks that deter merchants from integrating digital payment options.

Over time, this lack of clarity increases compliance costs for responsible participants while allowing opportunistic issuers to take advantage of the ambiguity.

Protecting Yourself in an Evolving Market

While the industry awaits more stringent guidelines, merchants and consumers can safeguard themselves by asking three essential questions before utilizing any stablecoin:

What backs the token? Distinguish between cash backing, Treasury reserves, or synthetic constructs. Tokens not backed 1:1 may not hold their value under pressure.
How fast can the token be redeemed for fiat? The speed of redemption indicates whether the token functions like traditional money. Delays or limitations suggest it behaves more like a financial product.
Where are the reserves held, and how often are they audited? Clarity around custody and regular independent audits confirms the reserves' existence, accessibility, and management.

Clear answers to these inquiries can help differentiate legitimate payment stablecoins from those with similar names but different functionalities. Until regulation catches up, it is crucial for everyday users to stay informed.

The Role of Rating Agencies

Traditional rating agencies like S&P have begun evaluating stablecoins based on their ability to maintain their pegs. Their early analyses indicate a pressing need for such scrutiny; for example, S&P recently downgraded Tether, the largest stablecoin token globally, to the lowest rating.

However, while rating agencies contribute valuable insight to users, they can only assess a small fraction of stablecoins at any given time. Long-term, regulatory bodies must help consumers and merchants navigate risk more effectively, establishing clearer standards for stablecoins. This clarity would not only enhance consumer protection but also facilitate smoother transactions across the industry.

In conclusion, while it might seem overly meticulous to safeguard the definition of "stablecoin," it is a fundamental step toward creating the trust, clarity, and transparency necessary for robust stablecoin commerce on a larger scale.