• Regulatory clarity should encourage banks to enter the stablecoin market, S&P said.

• Tether could see its dominance wane if the stablecoin bill is approved, the report said.

• New digital asset custody providers could emerge leading to greater competition.

Regulatory clarity in the U.S. should inspire banks from the traditional financial world to enter the stablecoin market and may also reduce the dominance of Tether's USDT, S&P Global Ratings said in a report on Wednesday.

A stablecoin is a type of cryptocurrency that serves as bedrock in crypto markets. U.S. Senators Cynthia Lummis (R-Wyo.) and Kirsten Gillibrand (D-N.Y.) introduced a new stablecoin bill last week that seeks to define how stablecoins will operate in the country.

The U.S. dollar is the most popular peg for stablecoins, but most stablecoin issuers aren't subject to specific U.S. regulations, the report said. This could change following the introduction of the Lummis-Gillibrand Payment Stablecoin Act last week.

"The new rules may offer banks a competitive advantage by limiting institutions without a banking license to a maximum issuance of $10 billion," analyst Andrew O'Neill wrote.

Tether's USDT has a market capitalization of $110 billion, making it the third-biggest cryptocurrency, according to CoinDesk data. Circle's USDC is in second place among stablecoins at $34 billion. Both track the U.S. dollar.

"An approval of the stablecoin bill would accelerate institutional blockchain innovation, in particular for tokenization or digital bond issuances involving on-chain payments," O'Neill said, adding that the "growth of institutional use cases for stablecoins would create opportunities for banks as stablecoin issuers and may also reduce tether's dominance in the global stablecoin market."

S&P said that USDT is issued by a non-U.S. entity and therefore is not a permitted payment stablecoin under the proposed bill. This means that U.S. entities can't hold or transact in it, which could reduce USDT's demand while at the same time giving a boost to U.S.-issued stablecoins. Still, USDT transaction activity is located mainly outside the U.S. in emerging markets and is driven by retail investors and remittances, the report noted.

"New providers of digital asset custody services could emerge with the removal of the SEC's requirement that custodians report digital assets on their balance sheet," the report added, and this could lead to greater competition.

S&P previously critiqued USDT for being worse than rivals at doing its core task: being valued at $1.

Read more: Stablecoins Are Seeing Adoption as a Cross-Border Settlement Mechanism: Bernstein