- The contraction of the stablecoin sector, driven by factors such as the US regulatory crackdown, banking network disruptions, and the FTX collapse, is preventing a sustained recovery in cryptocurrency prices, as per JPMorgan’s research.
- USD Coin (USDC) has lost market share to Tether (USDT) due to increased scrutiny from US regulators. The ban on Binance USD (BUSD) by the US Securities and Exchange Commission has further strengthened Tether’s dominance in the stablecoin market.
- JPMorgan analysts highlight that the growing share of US Treasury securities in major stablecoins’ reserves could pose challenges in maintaining pegs during a potential US technical default, which would impact the entire cryptocurrency ecosystem, including trading, decentralized finance (DeFi), and collateral.
According to a recent study conducted by JPMorgan, the ongoing contraction of the stablecoin realm is hindering any potential rebound in cryptocurrency prices. Stablecoins are a specific category of digital currencies that maintain their value by being tied to another asset, such as the US dollar.
The report, authored by Nikolaos Panigirtzoglou and his team, attributes the diminishing stablecoin sector to factors such as the US government’s intensified scrutiny of cryptocurrencies, disruptions in banking networks catering to the crypto ecosystem, and the lingering effects of last year’s FTX debacle.
Notwithstanding an optimistic beginning to 2021, the cryptocurrency market has experienced a downturn over the past month, with the total market capitalization dipping from $1.26 trillion on April 13 to $1.089 trillion recently.
USD Coin (USDC) has been negatively impacted by the US regulatory crackdown, losing market share to Tether (USDT). The research indicates that the US Securities and Exchange Commission’s (SEC) prohibition of competing stablecoin Binance USD (BUSD) has only further solidified Tether’s supremacy.
The analysts at JPMorgan also highlight that the US debt ceiling issue has drawn focus to the reserves held by major stablecoins and their investments in US Treasury securities. They point out that the proportion of Treasury securities in these reserves has been steadily increasing, which could pose a significant challenge for stablecoins to maintain their pegs if a US technical default were to occur.
Such a situation would have broader implications for the entire cryptocurrency ecosystem, considering the crucial role stablecoins play in facilitating trading and decentralized finance (DeFi) and serving as collateral. The report mentions that Tether has tried diversifying its stablecoin reserves to safeguard against potential consequences from the US debt ceiling issue.
Regulators Still Skeptic Towards Stablecoins
US regulators, including the SEC, harbor skepticism towards stablecoins despite their high trade volume from retail investors and large businesses. This mistrust stems from concerns regarding the transparency and stability of these digital assets, which are pegged to traditional currencies or other assets.
Regulators fear that the issuers of stablecoins may not hold sufficient reserves to maintain their pegs, potentially leading to liquidity crises in times of high volatility. Additionally, the lack of regulatory oversight and the potential for fraudulent activities surrounding stablecoins add to their wariness. Consequently, US regulators are taking a cautious approach and increasing scrutiny to ensure the protection of investors and the integrity of the financial system.