LONDON (Reuters) -The adoption of stablecoins could generate an additional $1.4 trillion in demand for U.S. dollars by 2027, if enough overseas investors want to own these digital assets, analysts at JPMorgan said in a note on Tuesday.

WHY IT'S IMPORTANT

The potential increase in dollar demand underlines the importance of the burgeoning stablecoin market in traditional finance. JPMorgan believes that rather than accelerating de-dollarisation, the growth in stablecoin adoption has the potential to reinforce the dollar's role in global finance.

BY THE NUMBERS

The stablecoin market, which JPM said is currently worth $260 billion, could grow to as much as $2 trillion in their high-end scenario.

Approximately 99% of stablecoins, such as Tether, are pegged 1:1 to the dollar, meaning if foreign households or corporations convert holdings of their local currency into stablecoins, it would represent new U.S. dollar demand.

CONTEXT

Stablecoins are digital tokens that have a stable value against a regular currency, mainly the dollar, and are backed by reserves like the currency itself or other assets, such as Treasuries and T-bills.  

Euro zone finance ministers are due to discuss on Thursday how they can support the development of euro-denominated stablecoins, a euro zone official said. 

KEY QUOTES

"Whether such a high-end scenario growth trajectory will actually play out remains to be seen, but if it does, stablecoin-related dollar inflows could become cumulatively significant," JPM said.

"Given that ~99% of the total stablecoin supply is pegged 1:1 to the dollar, stablecoin market growth necessarily implies some demand for the dollar."