Falling stablecoin supply is bad sign for crypto – Morgan Stanley

The SEC has launched an attack on stablecoin issuers. For example, Paxos, the publisher of Binance’s BUSD stablecoin, has come under heavy fire in recent days. BUSD would be an unregistered security according to the SEC. Paxos denies the allegations, yet the company is very active in destroying BUSD tokens. The supply of the USDC stablecoin also fell sharply. According to the American bank Morgan Stanley Is the drop in stablecoin supply not a good sign for the crypto sector?

Stablecoins are essential for crypto market

Stablecoins can be seen as the backbone of the crypto markets. For example, the pairs between stablecoins and crypto assets represent a large part of the total volume on crypto exchanges. Leverage services are also largely dependent on stablecoins that are lent by exchanges.

For example, the crypto bull market in 2021 was catalyzed by a growing supply of stablecoins. Morgan Stanley analysts explain the role of stablecoins on crypto prices:

“Rising market prices motivated traders to use more leverage in the form of borrowing stablecoins. These stablecoins were then used to buy even more crypto. Declining market prices were catalyzed by declining liquidity due to the closing of lung positions. This resulted in a large-scale redemption in the form of stablecoins.”

According to the analysts of the major American bank. Paxos has announced in response to the SEC’s allegations that it will stop using it in the coming year mint of new BUSD. On Monday alone, there was nearly $300 million to BUSD overturned. This amount is expected to increase in the near future. Paxos denies all allegations and says it is prepared to litigate harshly if it comes to this.

Stablecoins under attack

Crypto traders are already feeling the storm and seem to be keeping their hands off stablecoins for the time being. Next to BUSD supply also fell of the stablecoins USDC and DAI. Tether saw no noticeable drop in supply following the SEC’s attack.

According to Morgan Stanley, the falling supply of stablecoins is a bad sign. A falling supply is an indication of falling liquidity and falling use of leverage. The past has shown that a rising crypto market generally correlates with a rising supply of stablecoins.

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