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JPMorgan stated in a research report on Thursday that unless the contraction of the stablecoin ecosystem ceases, the possibility of a long-lasting revival in cryptocurrency prices remains uncertain.
A stablecoin refers to a cryptocurrency that is tethered to a specific asset, typically the U.S. dollar, providing a more stable value compared to other volatile cryptocurrencies.
“Headwinds from the U.S. regulatory crackdown on crypto, the unsettling of banking networks for the crypto ecosystem and the reverberations from last year’s FTX collapse are weighing on the stablecoin universe which continues to shrink,” analysts led by Nikolaos Panigirtzoglou wrote.
Despite an optimistic start to the year, the prices of cryptocurrencies have witnessed a slump over the past month, leading to a substantial reduction in the industry's overall market capitalization. Specifically, from April 13, when it stood at $1.26 trillion, the market cap has dwindled to $1.089 trillion.
The report highlights the adverse consequences of the regulatory clampdown in the United States on USD Coin (USDC). As a result, USDC has witnessed a decline in its market share among stablecoins, while Tether (USDT) has been capitalizing on this situation by gaining market dominance.
Tether's position of power has been further reinforced by the recent ban imposed by the U.S. Securities and Exchange Commission (SEC) on its competitor stablecoin, Binance USD (BUSD), according to the statement.
JPMorgan highlights that the U.S. debt ceiling dilemma has shed light on the reserves held by major stablecoins and their significant investments in U.S. Treasury securities.
“The share of U.S. Treasury securities in the reserves of major stablecoins has been increasing over time, implying a big challenge by stablecoins to maintain their pegs in an adverse scenario of a U.S. technical default,” the analysts wrote.
The report emphasizes that any challenges encountered by stablecoins in such a challenging situation would have far-reaching consequences on the entire crypto ecosystem. This is because these cryptocurrencies play a crucial role in facilitating trading, decentralized finance (DeFi) access, and serving as a vital source of collateral.
The bank acknowledges that Tether has actively pursued diversification of its stablecoin reserves as a precautionary measure against the U.S. debt ceiling problem.