JPMorgan Says the Crypto Market will Recover Once Stablecoins Stop Declining

In little over a month, the crypto market cap decreased by almost 200 million.

An American financial service company, JPMorgan analysts, led by Nikolaos Panigirtzoglou, have flagged that the stablecoin sector’s consistent decline could potentially slow down the recovery of cryptocurrency prices.

This year has been a rollercoaster ride for cryptocurrencies. After a promising start, the overall market cap of the industry plummeted from a high of $1.26 trillion on April 13th to a current value of $1.089 trillion.

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JPMorgan attributes the contraction of the stablecoin sector to various factors, including the rigorous US regulatory crackdown on crypto, disruption of the banking network, and the shockwaves from last year’s FTX collapse.

The report highlighted that USD Coin (USDC) is particularly feeling the heat from the US regulatory clampdown, losing stablecoin market share to Tether (USDT). Experts stressed that the shift in dominance is further fueled by the US Securities and Exchange Commission’s (SEC) ban on Binance USD (BUSD), a rival stablecoin.

The share of US 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 US technical default.

The US debt ceiling issue has drawn significant attention to the reserves of major stablecoins and their US Treasury securities holdings.

Furthermore, the bank emphasizes that given their roles in providing access to trading and decentralized finance (DeFi) and serving as a collateral source, any problems faced by stablecoins in such a situation could have a domino effect on the entire crypto ecosystem.

In the face of the US debt ceiling issue, the report also notes that Tether is proactively seeking to diversify its stablecoin reserves as a protective measure. This proactive approach highlights the importance of stablecoins within the broader crypto market and their vulnerability to external factors.

In other news, stablecoin issuers, including Paxos, Circle, and Tether, have reportedly spent over $1 million lobbying US authorities.