How the Fed’s Rate Cuts Could Slash Millions in Stablecoin Issuer Income
- Federal Reserve rate cuts may reduce stablecoin issuer income by $625 million per 50 bps cut.
- Stablecoin providers heavily rely on U.S. Treasurys to earn returns on their reserves.
- Lower interest rates could push issuers toward riskier assets for higher returns.
The Federal Reserve’s recent decision to begin cutting interest rates could have a significant financial impact on stablecoin issuers, according to a new report from CCData. Each 50 basis point (bps) rate cut is projected to result in a $625 million drop in annual interest income for these companies, which rely on U.S. Treasurys to generate returns from reserves backing their digital assets.
With the Fed signaling further cuts by the end of this year and into 2025, stablecoin providers may face shrinking revenue streams and may have to explore alternative reserve assets.
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Why Rate Cuts Hurt Stablecoin Issuers
Stablecoins are cryptocurrencies pegged to stable assets, often the U.S. dollar, with providers like Tether (USDT) and Circle (USDC) maintaining reserves in U.S. Treasurys. These reserves, which total nearly $125 billion, have allowed stablecoin providers to earn substantial interest income as rates climbed over recent years.
Currently, over 80% of stablecoin reserves are held in U.S. Treasurys. For example, Tether, the largest stablecoin by market cap, holds $93.2 billion in U.S. debt. This investment strategy contributed to Tether’s $5.2 billion in profits during the first half of 2024, as highlighted by the CCData report.
Potential Shift to Riskier Assets
As the Fed continues to cut rates, the returns on U.S. Treasurys will decrease, potentially prompting stablecoin issuers to seek out higher-yield assets.
Andrei Terentiev, Director of Engineering at Bitcoin.com, speculated that lower yields on safer assets could drive financial institutions toward riskier investments, including stocks and crypto, to maintain returns. Terentiev noted on X (formerly Twitter) that while such investments offer greater potential returns, they also come with increased risk.
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