U.S. investment bank Morgan Stanley (MS) has issued a warning to investors on cryptocurrency prices, saying that declining stablecoin issuance is likely to negatively impact crypto trading moving forward.
Specifically, Morgan Stanley said that trading in stablecoins plays a pivotal role in cryptocurrency trading as stablecoins compete with the traditional banking system.
The current crackdown by regulators such as the U.S. Securities and Exchange Commission (SEC) who are trying to limit the issuance of new stablecoins is likely to push prices for cryptos such as Bitcoin (BTC) and Ethereum (ETH) lower.
A drop in stablecoin market capitalization indicates a decline in cryptocurrency liquidity, which is the equivalent of quantitative tightening for the crypto sector, notes Morgan Stanley.
A stablecoin is a type of cryptocurrency whose value is pegged to another asset, typically the U.S. dollar or the price of gold.
During the crypto bull run of 2020 and 2021, Bitcoin’s price led the growth in stablecoin market capitalization, while during the current bear market the opposite has happened, said the bank.
Moving forward, Morgan Stanley expects U.S. crypto regulations to focus on stablecoins and says that issuers will probably have to register and prove they hold enough liquid assets to back the stablecoins they offer to the investing community.
In recent days, the SEC has cracked down on the issuance of new stablecoins and issued fines to several cryptocurrency exchanges.
SEC Chair Gary Gensler has warned of further regulations in the crypto sector, saying in media interviews that “The runway is getting awfully short. And we're here to try to protect the investing public.”
Morgan Stanley’s stock is down 3% over the last 12 months and trading at $99.43 U.S. per share.
