Expanding stablecoin market could attract trillions in dollar assets - JPMorgan

The growing global popularity of stablecoins - cryptocurrencies, the rate of which is linked to fiat currencies - may lead to a new strengthening of the role of the dollar and cause an influx of "trillions" into instruments denominated in this currency, JPMorgan believes. According to the bank's estimates, almost the entire volume of stablecoins is pegged to the U.S. currency or related instruments, which represents a trend that is the opposite of dedollarization.

"Rather than accelerating the process of dedollarization, the rise in the use of stablecoins could, on the contrary, strengthen the dollar's role in the global financial system," JPMorgan analysts wrote in a note cited by Bloomberg.

The bank's strategists estimate that about 99% of the total volume of stablecoins is now pegged to the U.S. dollar or dollar assets at a 1:1 rate. Predictions about the scale to which the market for stablecoins will grow vary even within JPMorgan itself. For example, a team of emerging markets analysts expects that demand could eventually reach $2 trillion. More cautious interest rate specialists in the U.S. estimate the possible level of adoption at about $500 billion, Bloomberg writes.

The upper end of JPMorgan's range suggests that by 2027, additional demand for the dollar could grow by about $1.4 trillion to support the growth of the stablecoin market. This is a significant amount, although not comparable to the daily turnover of $8.6 trillion traded in dollar-denominated currency pairs, according to the Bank for International Settlements.

Stablecoins are a type of digital currency issued by non-bank entities but backed by treasury bonds and reserves of large banks. Unlike bitcoin and other cryptocurrencies, whose rates are subject to strong fluctuations, stablecoins are designed to track the value of traditional currencies - mainly the dollar - at a one-to-one ratio, Bloomberg explains.

While the growth of the stablecoin market may indicate increased demand for the dollar, it depends on the source of that demand. If it is based only on the reallocation of funds from U.S. bank deposits or money market funds, the effect will be neutral for the dollar. However, if the demand comes from foreign companies and households, it will lead to additional purchases of the U.S. currency, the agency notes.

According to the JPMorgan team, so far the growth of stablecoins has not had a noticeable impact on currency flows. However, analysts note that over the past two years there has been a close correlation between the value of the dollar and the total market capitalization of stablecoins as an asset class.

If bitcoin, which hit an all-time high this week, and the dollar continue to rise over the long term, it could signal further expansion of the stablecoin market, JPMorgan said.

"At the moment, steblecoins are more dependent on the dollar than other segments of the global financial system, including foreign exchange reserves and trade settlement. If the correlation between the dollar and bitcoin remains positive and both assets strengthen, it can be assumed that this will create the most favorable conditions for the realization of the upper limit of forecasts for the size of the market of stablecoins," the analysts of the bank wrote

This article was AI-translated and verified by a human editor