What to Take Away
- A new report on the cryptocurrency industry states that stablecoin issuers will see a decrease in revenue as a result of the Federal Reserve’s recent decision to lower interest rates.
- Stablecoin issuers have held U.S. Treasury bills in order to get a return on the reserves that back their digital assets.
U.S. Treasurys are held by stablecoin providers for nearly $125 billion, and with each 50 bps rate cut, annual interest income from these assets is expected to drop by $625 million. - According to a crypto industry executive, stablecoin providers may need to look into alternative reserves to back their digital assets if rates continue to fall as anticipated.
- As the Federal Reserve (Fed) began its first rate cut cycle since 2020, stablecoin issuers may face lower income.
A new report from digital asset data provider CCData says that stablecoin issuers could see a $625 million drop in total annual interest income for every 50 basis point cut by the Fed.1 These hits could quickly add up, as the Fed expects cuts totaling 50 basis points by the end of this year and another 100 basis points by the end of next year.
Why Would Stablecoins Be Affected By A Rate Cut?
The value of a cryptocurrency known as a stablecoin is tied to that of another cryptocurrency. To keep their value tied to the United States dollar, some of the most well-liked stablecoins keep a reserve in cash or equivalent investments, typically U.S. Treasurys.
Over the past few years, as high interest rates drove up Treasury yields, centralized providers of stablecoins like Tether (USDTUSD) and Circle (USDCUSD) have relied heavily on their holdings of U.S. Treasurys earning interest.
Stablecoin issuers hold just over 80% of their reserves in U.S. Treasury securities. This amounts to Treasury holdings worth nearly $125 billion.
According to the CCData report, Tether, the largest stablecoin by market cap, alone holds $93.2 billion in U.S. debt, which accounted for a significant portion of that digital asset company’s $5.2 billion in profits in the first half of 2024.
Andrei Terentiev, director of engineering at Bitcoin.com, made a social media post speculating that lower interest rates might eventually force stablecoin providers and other financial institutions to invest in riskier assets in an effort to return their reserves.
Terentiev wrote in a post that was published on the platform X.2: “Think stocks, crypto, and other investments that offer higher potential returns but come with greater risk.” “With lower yields on safer assets, institutions often shift their focus toward ‘risk-on’ assets.”
