Stablecoins are designed to be less volatile than most virtual currencies, but even they weren’t immune from this year’s regulatory crackdown on crypto and the banking crisis. The market caps of some of the largest stablecoins have fallen since the start of the year and are well off their highs of early 2022, when the bear market intensified. “The headwinds from the U.S. regulatory crackdown on crypto, the unsettling of banking networks for the crypto ecosystem and the reverberations from last year’s FTX collapse are weighing on the stablecoin universe, which continues to shrink,” said JPMorgan analyst Nikolaos Panigirtzoglou. Stablecoins are like cash in crypto markets: They are supposed to be pegged to the value of a stable asset, such as the U.S. dollar. Stablecoins play an important role bridging traditional and digital currencies and giving market participants access to crypto trading and protocols. For many, that makes them a proxy for the amount of fiat money entering and leaving crypto, Panigirtzoglou said. In February, New York state regulators ordered Paxos to stop minting new Binance USD tokens. A month later, Circle’s USDC stablecoin briefly broke its peg to the U.S. dollar, dropping below 87 cents, after the company said it had $3.3 billion of its cash reserve at Silicon Valley Bank. “It would be difficult here to imagine a sustained recovery in crypto prices without the shrinkage of the stablecoin universe stopping,” Panigirtzoglou said Stablecoins this week While crypto trading was muted this week, stablecoin developments were in the spotlight. The House Financial Services Committee’s digital assets subcommittee gathered to discuss two competing stablecoin-focused bills. Tether, the issuer of the controversial USDT stablecoin, said it will buy bitcoin to diversify its reserves and protect itself against U.S. debt ceiling uncertainty. USDT has a circulating supply of more than $82.8 billion, according to CoinGecko. In the past, it has drawn controversy over the quality of its reserve assets, which included and may still include commercial paper — a form of short-term, unsecured debt issued by companies. Since then, U.S. Treasury securities have accounted for the majority of its reserves. Republican negotiators walking out of the high-stakes debt ceiling talks Friday also has implications for stablecoins. “The share of U.S. Treasury securities in the reserves of major stablecoins has been increasing over time, implying a big challenge by stablecoins to maintain their pegs in an adverse scenario of a U.S. technical default,” Panigirtzoglou said. Tether and Circle’s USDC hold about 65% and 57%, respectively, of their stablecoin reserves in T-bills, according to the companies’ attestation reports. “Any challenges faced by stablecoins in this adverse scenario could reverberate to the whole crypto ecosystem given the vital role stablecoins play in the crypto ecosystem in facilitating access to trading and decentralized finance and as a source of collateral,” Panigirtzoglou said.