The stablecoin market cap is growing again, which is a good sign for crypto market liquidity, but it hasn’t fully recovered and could face regulatory challenges this year, according to JPMorgan. Stablecoins expanded by $60 billion between their May 2022 peak and their October 2023 low of $122 billion. The top came just before the collapse of the Terra network, which created the contagion that spread to other stablecoins and crypto lenders that year. But as investors anticipated the Securities and Exchange Commission’s approval of spot bitcoin ETFs in the U.S., the market expanded by $9 billion between October 2023 and January 2024. This is generally a “positive sign” for crypto, according to JPMorgan analyst Nikolaos Panigirtzoglou. “Stablecoins link the traditional financial system to the crypto ecosystem and by being the equivalent of ‘cash’ in the crypto ecosystem are both the ‘lubricant’ and major source of collateral,” Panigirtzoglou said in note Thursday. Stablecoins are cryptocurrencies that have prices pegged to an underlying asset. It’s typically a fiat currency — usually the U.S. dollar — although there are also stablecoins that are pegged to commodities or other financial assets. Investors look for the supply of stablecoins to grow when the market is rising as a positive sign of capital entering, which tends to support prices. Despite bitcoin’s stellar 157% gain in 2023 and nearly ideal setup for 2024, the crypto market has been struggling with low liquidity since last year. It began with a regulatory crackdown on stablecoins, starting with Binance USD (BUSD) last February. A month later, USD Coin (USDC) got caught up in the Silicon Valley Bank panic and briefly broke its peg to the U.S. dollar after its issuer, Circle, said it had $3.3 billion of its cash reserve at SVB. Stablecoins face regulatory risk going forward, however, Panigirtzaoglou said. In the U.S. a key stablecoin bill is awaiting approval from the Congress, while in Europe, partial implementation of the Markets in Crypto-Assets regulation (also known as MiCA) is expected to become law this year. Tether (USDT) , the biggest and most popular stablecoin, has also been widely criticized for its lack of transparency about the backing of the coin. Its market cap has grown almost 5% since August, according to CryptoQuant, benefiting in part from turbulence in rivals USDC and BUSD. “Tether is mostly at risk given its lack of regulatory compliance and transparency,” Panigirtzaoglou said. “We therefore view the increasing concentration in Tether over the past year as a negative for the stablecoin universe and the crypto ecosystem more broadly.” By contrast, USDC, whose issuer confidentially filed for an initial public offering last month, could benefit from a coming crackdown, he added. “Stablecoin issuers that have been more aligned with existing regulations are likely to benefit from the coming regulatory crackdown on stablecoins and gain market share,” he said. “USDC … appears to be looking to expand across jurisdictions and to be proactively preparing for the upcoming stablecoin regulations.” USDC’s market cap has expanded by about 8% since August. —CNBC’s Michael Bloom contributed reporting.