The “crypto counterpart of quantitative tightening” is occurring, according to Morgan Stanley (MS), as a result of weakness in crypto markets, the collapse of a dollar stablecoin, and a reduction in leverage in decentralized financing (Defi).
Tether (USDT) lost its dollar peg intraday following the recent collapse of stablecoin TerraUSD (UST), causing crypto prices to tumble further as some questioned the stability of the third-largest cryptocurrency, according to the bank.
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According to the survey, USDT has a market valuation of $73 billion and is the most heavily traded digital asset on a daily basis. USDT is the currency against which more than half of all bitcoins (BTC) are traded on exchanges.
According to the bank, investors are redeeming USDT at an all-time high. In the last month alone, $10.6 billion worth of stablecoins were redeemed, despite the fact that issuance of other stablecoins has remained flat.
As the entire stablecoin market cap declines, liquidity on decentralized exchanges and leverage on lending platforms fall even quicker, Morgan Stanley calls this the “crypto counterpart of quantitative tightening.”
According to the statement, $5.9 billion of the $10 billion in USDT redeemed was on the TRON blockchain, with substantially less on Ethereum. Binance is the largest cryptocurrency exchange in the world, with a market capitalization of $21 billion.
Binance, FTX, and Bitfinex were the top three USDT redeemers, according to the research. According to the report, curve, a Defi exchange hosts more than a third of USDT on Defi platforms, and traders were exchanging USDT for other stablecoins.
Because leveraged crypto enterprises typically borrow from one other, “systemic spillover” risks from the crypto markets to the fiat banking system appear to be low, according to the bank.
If USDT goes significantly below its $1 peg, however, it will have a more negative impact on crypto and risk markets.