Stablecoins are expanding the definition of what we call 'money'

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A widespread misconception is that stablecoins are fungible, which means that they are all equal in value and utility and can be seamlessly swapped for each other.

What's more, this is assumed to be a precondition for the consideration of stablecoins as a type of money.

Both assumptions are incorrect.

Below, I'll outline how, and why the mistaken assumptions matter — it's about more than changing definitions.

Let's start with why stablecoins are not fungible.

First, they may all be backed 1:1 by dollar assets, but they are not all equal to exactly $1 at any given time. Stablecoins trade on active exchanges at market prices which are rarely equal to exactly $1. They oscillate around that level and rarely deviate from it by more than fractions of a basis point for long — but the difference in market prices highlights that, although most have USD in their name, these are different assets.

Second, not all applications accept all stablecoins. Stripe, for instance, accepts payments in USDC (issued by Circle), USDP (issued by Paxos) and USDG (issued by Paxos Digital Singapore). It does not accept USDT, the ecosystem's largest stablecoin. So, for Stripe users, USDT and USDC are not fungible because they do not have the same utility.

Third, not all applications work on all chains. Uniswap, for instance, is one of the ecosystem's oldest and largest decentralized exchanges. It operates on a wide range of blockchains but not on Tron, which means it can't accept stablecoins that run on Tron — which happens to be where over 40% of USDT's circulating supply moves. It is relatively simple to swap a Tron-based USDT for one on ethereum before sending to the protocol's smart contract. But, for Uniswap users, the utility for USDT on Tron and USDT on ethereum are technically different, and therefore the tokens are not fungible.

Fourth, there are jurisdictional differences. A U.S. dollar stablecoin issued in the European Union under the MiCA regulatory framework, for example, must hold at least 30% of its reserves in cash in commercial banks. This is arguably less safe than dollar stablecoins issued in the U.S., which can keep reserves in short-term U.S. government bonds or other cashlike liquid instruments. Can dollar stablecoins with different backing compositions be fungible when some configurations are less secure than others?

Fifth, not all backers are created equal. Tether is the issuer of USDT, which leads the pack with a market capitalization of over $180 billion. PayPal is the issuer of PYUSD, with a market capitalization of under $3 billion. Users that prioritize liquidity would choose USDT. Those that prefer the reassurance of a U.S.-regulated financial institution would choose PYUSD. The fact that there is a distinction highlights that USDT and PYUSD are not fungible with each other, despite both representing the same underlying asset (the dollar).

And finally, there's the transaction history. One of the features of public blockchains is the ability to trace a token's movements between addresses. In theory, this enables applications to reject tokens that were recently associated with a certain address, such as one that had received tokens fresh from a theft and could therefore be assumed to belong to the thieves. This can happen with dollars, too, such as bills seized during a raid — but once these are released back into circulation, the stigmatizing history is erased. Not so with tokens: A stablecoin that has passed through flagged addresses potentially has more limited utility than one that has just been minted. (Caveat: crypto "mixers" shuffle tokens to mask their provenance, an ongoing point of contention between law enforcement and privacy advocates.)

Strangely, the U.S. GENIUS Act is silent on the issue of fungibility. It does not mention it at all, nor does it insist that par value be respected between different stablecoins.

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It does establish that the relevant regulators will work with state financial authorities, the National Institute of Standards and Technology and other standard-setting bodies to "assess and, if necessary, … prescribe standards for permitted payment stablecoin issuers to promote compatibility and interoperability." But the acknowledgement that standards are needed further highlights the diversity within the stablecoin category.

Now that we have established that stablecoins as an asset group are not necessarily fungible, why does this matter?

For one, stablecoins have the same function as dollars — payment, settlement, store of value — only they move on different rails. Consequently, they are treated as if they are money.

But, at least according to the textbooks, one of the key characteristics of money is that it is fungible. A dollar is always worth a dollar and can be exchanged anywhere within the U.S. and many other jurisdictions for a dollar's worth of goods or services. You don't need to worry about trust in its issuer, or the configuration of the rails it runs on.

So, if stablecoins aren't fungible, can they be considered money? According to the GENIUS Act, yes they can: It defines money as "a medium of exchange currently authorized or adopted by a domestic or foreign government," and then goes on to authorize stablecoins as a digital asset "used as a means of payment or settlement."

Here's where it gets even more interesting.

It's obvious this epistemic conflict can only be reconciled by acknowledging that the old definitions of money no longer apply.

But what we are witnessing is more than that: It's a profound mindset shift. Beyond adjusting the required characteristics, we are moving into a new money paradigm in which characteristics matter less than action.

Issues with stablecoin fungibility can, with limited exceptions, be abstracted away at the back end in a matter of nanoseconds as smart contracts swap one stablecoin for another. This enables stablecoins to effectively be used as money and nudges our collective focus toward what money does rather than what money is.

In turn, this mindset of action rather than stasis opens the door to faster and broader innovation in which results matter more than familiar limitations on access.