Benzinga - Morgan Stanley (NYSE: MS) researchers say stablecoin products can potentially compete with traditional banking systems, and its falling market capitalization indicates a reduction in cryptocurrency liquidity and leverage, Coindesk reported.
Stablecoins are a type of cryptocurrency whose value is pegged to another asset, such as the U.S. dollar or gold.
The bank further notes that U.S. regulators have started to limit stablecoin products, and expects that regulatory efforts will focus on stablecoin regulation, with issuers likely required to register and prove they hold enough liquid assets to back the issued stablecoins.
The report highlights that "all stablecoins rely on market trust in the system's ability to keep a stable value."
The research report goes on to explain how stablecoin market capitalization started falling around the same time as the Federal Reserve balance sheet.
During the bull market of 2021, Bitcoin's (CRYPTO: BTC) price led the growth in stablecoin market capitalization.
However, during the bear market of 2022, the opposite occurred.
"Rising market prices enticed traders to take on more leverage, in the form of borrowing stablecoins, which was then used to buy more crypto," the report states.
"Falling market prices were catalyzed by a reduction in crypto liquidity caused by traders closing long crypto positions, followed by redemptions of the stablecoin received."
Morgan Stanley suggests that regulatory efforts will likely focus on stablecoin regulation in the near future.
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