Stop calling everything a “stablecoin” | Opinion

When Stream Finance’s XUSD token lost its $1 peg in November 2025, plunging as low as $0.43 as the assets backing the token came under stress, the drama triggered a wave of alarming headlines. Frantic media stories decried another “stablecoin depegging,” sparking confusion about the safety of digital payments.

Many commentators treated XUSD’s collapse as evidence of systemic risk in the broader stablecoin market, frightening a mainstream public that is still tentative towards digital payments. This framing overlooks an essential fact. XUSD does not fit most experts’ definition of a stablecoin, and the problems that brought it down do not apply to fully reserved, transparently backed payment tokens.

As stablecoins reach mainstream users, the industry must explain clearly what a stablecoin is and what it is not. The term now sits at the center of payment infrastructure, settlement systems, and cross-border commerce. It cannot be allowed to drift into vague marketing language. Just as “security” and “commodity” are terms with precise definitions that carry specific rights and risks, “stablecoin” must be a carefully protected and policed category. Without that clarity, consumers, merchants, and policymakers will continue to misinterpret the protections and tradeoffs involved.

Aren’t All Stablecoins the Same?

Many people assume that any token labeled a stablecoin is any digital token pegged to one dollar or one euro. In practice, these instruments differ in structure, solvency risk, and user protections. Treating them as equivalents leads to predictable confusion and unnecessary fear.

Most products labeled as a “stablecoin” fall into one of four categories:

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  Synthetic stablecoins: These tokens rely on reserves composed of derivatives, collateralized loans, or other engineered structures rather than cash or short-dated Treasuries. They track a dollar in calm conditions but can break sharply during liquidity stress because their peg is not guaranteed.
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  Tokenized deposits: Banks and financial institutions issue digital representations of their own liabilities or time deposits, and these often get labeled or marketed as stablecoins. They are not. They function as tokenized versions of traditional banking products, and often carry withdrawal limits, maturity terms, and issuer-specific credit risk.
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  Algorithmic stablecoins: Algorithmic stablecoins use mint burn mechanisms and reflexive incentives to maintain a peg without hard reserves. The collapse of prominent algorithmic stablecoin Luna in 2022 has largely relegated these products from the market, but they are still legally permissible in most jurisdictions, and investors should remain wary.
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  “True” stablecoins that are fully reserved and redeemable 1:1: These stablecoins are backed by high-quality, highly liquid assets such as cash and short-dated Treasuries, held in segregated accounts, and subject to regular independent attestations. Their defining feature is immediate redemption for fiat at par value. This structure gives merchants predictable settlement timing and gives users confidence that the token behaves like cash under any condition.

Only the fourth category deserves the label “stablecoin.” The others may have valid use cases, but they are fundamentally different financial instruments and carry fundamentally different risks to investors. The inability to distinguish between these categories is what turns isolated failures into headlines about systemic instability.

The Dangers of Letting “Stablecoin” Become Loosely Defined

Financial markets rely on clear definitions to support trust, oversight, and orderly competition. The terms “security” and “commodity” signal specific protections, disclosures, and supervisory expectations. Issuers cannot label a product a security or a commodity unless it meets the standards of that category. Regulators intervene when firms attempt to blur the lines because clarity protects both markets and consumers.

Stablecoins deserve the same treatment. They now serve as settlement rails, corporate treasury tools, and consumer payment instruments. They move across borders, support payroll flows, and anchor new categories of financial applications. A stablecoin label should carry standardized expectations about asset quality, redemption mechanics, reserve management, and disclosures. Without clear terminology, markets become vulnerable to misrepresentation, and consumers face unnecessary risk.

A loosely defined category creates repeated cycles of consumer harm. People hear the word “stable” and assume the safety of a cash-like instrument. Attaching that label to synthetic or algorithmic structures hides the fact that these instruments behave differently under pressure. Users who confuse one for the other can suffer losses that would have been avoided with clearer labeling. Each incident erodes trust in the entire category, including the fully reserved tokens that continue to operate as intended.

Mislabeling also produces reputational contagion. When synthetic products fail, headlines describe them as stablecoin collapses, even when they share no structural similarities with cash-backed tokens. This slows the adoption of reliable payment products and forces businesses to allocate time and resources to validate which tokens behave predictably.

The cost extends to merchants. Businesses depend on predictable settlement and redemption profiles. Ambiguous labeling creates counterparty and liquidity risk that deters merchants from accepting digital payments or integrating them into their operations.

Over time, the lack of crisp categories raises compliance costs for responsible actors while encouraging opportunistic issuers to exploit the ambiguity.

Remaining Vigilant Until Regulators Step In

As the industry waits for more consistent guidance, merchants and consumers can protect themselves by asking three basic questions before using any stablecoin.

First, what backs the token? Users should distinguish between cash and Treasury backing, bank deposits, and synthetic constructions. If a token isn’t backed by 1:1 cash and treasury reserves, it may not maintain its peg under stress.

Second, can the token be redeemed for fiat on demand, and how fast? Redemption speed determines whether the token functions like money; any delays or restrictions signal that it behaves more like a financial product.

Third, where are the reserves held, how often are they attested, and by whom? Clear custody and regular independent attestations verify that reserves exist, are accessible, and are managed with credible oversight.

Clear answers to these questions separate true payment stablecoins from products that only resemble them in name. Until regulators step in, it’s critical for everyday users to remain vigilant.

Traditional rating agencies, such as S&P, have started to rate stablecoins on their ability to maintain their pegs, giving users and merchants a useful signal to determine the riskiness of a particular product. Their early reporting indicates just how urgently this type of analysis is needed: S&P recently downgraded Tether, the largest stablecoin-labeled token in the world, to the lowest possible rating.

Although ratings agencies are providing much-needed clarity for consumers, they are only able to audit a few tokens at a time, and so far have produced reports for only a minuscule fraction of the stablecoins currently on the market. Long-term, regulators need to remove the burden on merchants and consumers to identify risks on their own. Clearer regulatory standards will also make stablecoins more fungible and save consumers and merchants the hassle of performing a credit check every time they wish to perform a stablecoin transaction.

While protecting the integrity of the term “stablecoin” may seem pedantic, it is a foundational step in establishing the trust, clarity, and transparency necessary to support stablecoin commerce at scale.