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I'd hazard a guess here that it's not "solid" stainless steel. I think it's plated, and the stainless has come off revealing bog standard cheap steel below, which is now rusting.
Whether that makes it safe, I don't know. I'd say probably not because the plating is steel and the resultant oxidation probably isn't the best thing to be drinking either
Coating on stainless steel? New to me too, I wonder why it would be considered necessary. Read about the peeling on amazon reviews as well.