Stablecoin Issuance Drop Worries Morgan Stanley About Crypto Market Stability
According to a research report published by American investment banking company Morgan Stanley on February 13, stablecoins play an important part in cryptocurrency trading, and their products might possibly compete with the traditional banking system.
The institution mentions that authorities in the United States have started placing restrictions on stablecoin products—referring to the recent crackdown on BUSD issuer Paxos—and adds that the issuing of stablecoins is essential for cryptocurrency dealers.
According to the findings of the research, a declining market capitalization for stablecoins is a sign of declining cryptocurrency liquidity and leverage. This is the same thing as quantitative tightening for the cryptocurrency market.
The balance sheet of the Federal Reserve began to shrink at the same time as the market capitalization of stablecoins began to decrease, according to Morgan Stanley.
The price of bitcoin (BTC) led to the increase in stablecoin market capitalization during the bull market in cryptocurrencies that happened in 2021; however, the research highlighted that the reverse occurred during the bear market that occurred in 2022.
The increasing prices on the market attracted traders to employ greater leverage in the form of borrowing stablecoins, which they subsequently used toward the purchase of further cryptocurrency.
According to the research, the drop in cryptocurrency liquidity that resulted when traders closed their long crypto positions was the primary factor that led to the falling market prices. This was followed by redemptions of the stablecoin that was received.
The financial institution anticipates that regulatory efforts in the United States will center on the regulation of stablecoins and believes that issuers will probably be required to register and verify that they own sufficient liquid assets to back the stablecoins that they issue.
Stablecoins are a subset of cryptocurrencies whose value is linked to that of a preexisting asset, such as the U.S. dollar, gold, or even another cryptocurrency.
Crypto Ecosystem is Becoming Less Decentralized: Morgan Stanley
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Morgan Stanley (MS) stated in a research report on Wednesday that the crypto ecosystem is becoming less decentralized.
Although the underlying blockchains are decentralized, as crypto regulation evolves, the necessity to run a big portion of the blockchain on a single or small group of cloud providers becomes a possible problem, according to the paper.
As per the research, 65% of Ethereum nodes are cloud-hosted, with half of these using Amazon Web Services (AWS). This might become an issue if particular service providers decide to ban specific participants or crypto products, or if there are extended server outages.
Following the switch to proof-of-stake, the Ethereum blockchain has grown more centralized since only four organizations control 60% of the validators, according to the report.