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Morgan Stanley Sees Crypto Equivalent of Quantitative Tightening

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Weakness in crypto markets, the failure of a dollar stablecoin and a reduction in leverage in decentralized finance (DeFi) are resulting in the “crypto equivalent of quantitative tightening,” Morgan Stanley (MS) said in a report Tuesday.

The recent collapse of stablecoin TerraUSD (UST) saw Tether (USDT) also lose its dollar peg intraday, and this caused crypto prices to drop further as some questioned the stability of the third-largest cryptocurrency, bank said.

USDT has a market cap of $73 billion and is the most heavily traded digital asset on a daily basis, the report said. More than half of all bitcoins (BTC) traded on exchanges are traded against USDT.

Investors are redeeming USDT at a record pace, the bank said. Some $10.6 billion of redemptions occurred in the last month alone, while other stablecoin issuance is not rising.

Morgan Stanley called this the “crypto equivalent of quantitative tightening, as total stablecoin market cap falls, and liquidity on decentralized exchanges and leverage on lending platforms falls even faster.”

Of the $10 billion of USDT redeemed, $5.9 billion was on the TRON blockchain, with much less on Ethereum, the note said. At $21 billion, crypto exchange Binance is the largest known owner of USDT and controls 49% of the stablecoin issued on TRON, the note added.

According to the report, Binance, FTX and Bitfinex were the three largest redeemers of USDT. Curve, a DeFi exchange, hosts over a third of USDT on DeFi platforms, and here traders were swapping USDT for other stablecoins, it added.

“Systemic spillover” risks from the crypto markets to the fiat banking system appear limited, the bank said, because the leveraged crypto companies usually borrow from each other. However, if USDT falls materially under its $1 peg, this would have a larger negative impact on crypto and risk markets.

Read more: BofA Says Crypto Winter, Contagion Risk Concerns Are Overdone