Important points
According to a new crypto industry report, the Federal Reserve’s recent decision to cut interest rates will lead to lower revenue for stablecoin issuers.Stablecoin issuers earn revenue from the reserves that back the digital assets they issue. As a method, they have held US bonds. Stablecoin providers hold approximately $125 billion in U.S. Treasuries, and each 50 bps rate cut is expected to reduce the annual interest income earned from these assets by $625 million. If interest rates continue to fall as expected, stablecoin providers may need to consider. Crypto industry executives predicted the need for alternative reserves to back digital assets.
As the U.S. Federal Reserve begins its first interest rate cutting cycle since 2020, stablecoin issuers may be looking at reduced revenue.
Every 50 basis points cut by the Fed could reduce total annual interest income for stablecoin issuers by $625 million, according to a new report from CCData, a digital asset data provider.
Those hits could add up quickly, as the Fed itself expects to cut rates by a total of 50 basis points by the end of this year and another 100 by the end of next year.
Why would interest rate cuts affect stablecoins?
A stablecoin is a cryptocurrency whose value is pegged to another cryptocurrency. Some of the most popular stablecoins have their value pegged to the US dollar and hold reserves in cash or equivalent investments (often in the US Treasury) to keep it pegged. .
Centralized stablecoin providers such as Tether (USDTUSD) and Circle (USDCUSD) have relied heavily on holding interest-earning U.S. Treasuries over the past few years as high interest rates and U.S. Treasury yields have risen.
The majority of reserves held by stablecoin issuers are in US Treasuries, accounting for over 80%. This would mean holding approximately $125 billion worth of U.S. Treasuries.
Tether alone, the largest stablecoin by market capitalization, holds $93.2 billion worth of U.S. bonds, which accounted for most of the digital asset company’s $5.2 billion profit in the first half of 2024, according to a report by CCData. It is said that it was occupied.
Bitcoin.com Director of Engineering Andrei Terentyev said on social media that falling interest rates will eventually force stablecoin providers and other financial institutions to invest in riskier assets in order to earn returns on their reserves. It is assumed that there is a possibility of investing in
“Financial institutions often shift their focus to ‘risk-on’ assets due to lower yields on safer assets,” Terentiev wrote on Platform Think of it as offering benefits, but with greater risk.” he wrote.
