In response to a analysis report printed by American funding banking firm Morgan Stanley on February 13, stablecoins play an essential half in cryptocurrency buying and selling, and their merchandise may probably compete with the standard banking system.
The establishment mentions that authorities in the US have began inserting restrictions on stablecoin merchandise—referring to the current crackdown on BUSD issuer Paxos—and provides that the issuing of stablecoins is important for cryptocurrency sellers.
In response to the findings of the analysis, a declining market capitalization for stablecoins is an indication of declining cryptocurrency liquidity and leverage. This is similar factor as quantitative tightening for the cryptocurrency market.
The steadiness sheet of the Federal Reserve started to shrink concurrently the market capitalization of stablecoins started to lower, in accordance with Morgan Stanley.
The worth of bitcoin (BTC) led to the rise in stablecoin market capitalization throughout the bull market in cryptocurrencies that occurred in 2021; nevertheless, the analysis highlighted that the reverse occurred throughout the bear market that occurred in 2022.
The growing costs available on the market attracted merchants to make use of higher leverage within the type of borrowing stablecoins, which they subsequently used towards the acquisition of additional cryptocurrency.
In response to the analysis, the drop in cryptocurrency liquidity that resulted when merchants closed their lengthy crypto positions was the first issue that led to the falling market costs. This was adopted by redemptions of the stablecoin that was acquired.
The monetary establishment anticipates that regulatory efforts in the US will middle on the regulation of stablecoins and believes that issuers will most likely be required to register and confirm that they personal ample liquid belongings to again the stablecoins that they difficulty.
Stablecoins are a subset of cryptocurrencies whose worth is linked to that of a preexisting asset, such because the U.S. greenback, gold, and even one other cryptocurrency.