Concerns about stablecoins following UST’s collapse have exacerbated declines in digital asset prices, the bank said.

Cryptocurrencies are notably below their peak and mounting concerns about stablecoins following the collapse of terraUSD’s (UST) has led to outflows from the largest stablecoin tether (USDT), Citibank (C) said in a report on Tuesday.

These concerns have most likely compounded declines in crypto markets, the report said.

“Volatility has affected user adoption,” the Wall Street giant said, noting that trading volumes and active addresses spiked around the time of the Luna (LUNC) collapse, which indicate user adoption, but these increases have since reverted to previous levels, or even lower.

According to Citi “tentative evidence suggests a reduction in trading volumes and futures positions but not wholesale declines in investor interest in the space.”

”After Luna’s collapse there were concerns about outflows in USDT, but these have since slowed, the bank said. Some flows went to the more “transparent and centralized” USD Coin (USDC) stablecoin, while others exited the market altogether.

Total value locked (TVL) in decentralized finance (DeFi) has fallen in U.S. dollar terms but is stable in terms of ether (ETH), especially when accounting for the value lost in the Anchor protocol following the collapse of UST and LUNC, the note said.

DeFi is an umbrella term used for lending, trading and other financial activities carried out on a blockchain, without traditional intermediaries.

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

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Recent weakness in bitcoin and equities looks contemporaneous and doesn’t show any lag or lead effect, the bank’s analysts said.

Cryptocurrency markets have been under pressure in the past week following the collapse of the third-largest stablecoin, terraUSD (UST), Citi said in a note published May 13.

The fall in crypto markets took place against the backdrop of already weak risk assets, and Citi says it does not expect a broader economic fallout because the digital-asset market is still relatively small compared with traditional asset classes and the make-up of household wealth.

The analysts said they saw no apparent “lead effect” from bitcoin to S&P 500 index futures. The recent weakness in bitcoin and equities appears “contemporaneous,” according to the report. Still, given the existing poor sentiment in equities, the fall in crypto markets doesn’t help, it said.

Bitcoin is expected to remain highly volatile, and is influenced by many factors including potential regulatory action, the report added, noting that the BTC price has declined close to “production cost and spot adoption model implied valuations.”

The bank sees production costs as a floor because below these levels it is “less economical for mining, which may lead to a decline in hash rates, and an adjustment in algorithm difficulty to keep the bitcoin mining reward rate constant.”

Citi says regulatory interest in stablecoins is likely to increase after the UST depegging.

Morgan Stanley said in a report Thursday that clients were asking whether the large drop in crypto prices and the depegging of stablecoins poses a “more systematic risk for broader financial markets.”

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