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Cryptocurrency News Articles
Stablecoin Issuers Could See Lower Income as the Fed Kicks Off Rate Cut Cycle
Sep 28, 2024 at 03:20 am
Stablecoin issuers could be looking at lower income as the Federal Reserve (Fed) kicked off its first rate cut cycle since 2020.
Stablecoin issuers may experience a decline in income as the Federal Reserve begins a new round of interest rate cuts. According to a report by CCData, each 50 basis point cut by the Fed could lead to a $625 million drop in total annual interest income for stablecoin issuers.
The impact of interest rate cuts on stablecoins stems from the way some stablecoins are designed. Stablecoins are cryptocurrencies that derive their value from an external benchmark, such as fiat currencies or other crypto assets. Some of the most popular stablecoins, such as Tether (USDT) and USD Coin (USDC), have their value pegged to the U.S. dollar and maintain a reserve in cash or equivalent investments—often U.S. Treasurys—to support this peg.
Centralized stablecoin providers, such as Tether and Circle, the issuer of USDC, have generated substantial income in recent years from the interest earned on their holdings of U.S. Treasurys as high interest rates drove up Treasury yields. According to the CCData report, U.S. Treasurys comprise the vast majority of reserves held by stablecoin issuers, at just over 80%, amounting to holdings of nearly $125 billion worth of Treasurys.
The report highlights that stablecoin issuers are heavily reliant on the income generated by their reserves, particularly in the absence of other significant revenue streams. For instance, Tether, the largest stablecoin by market capitalization, alone holds $93.2 billion worth of U.S. debt, which contributed significantly to the digital asset company's $5.2 billion of profits in the first half of 2024, as noted in the CCData report.
As the Federal Reserve pivots toward cutting interest rates, stablecoin issuers may face a challenge in maintaining their current levels of income. Each 50 basis point cut by the Fed could lead to a $625 million drop in total annual interest income for stablecoin issuers. The Fed itself anticipates cuts totaling 50 basis points by the end of this year and another 100 basis points by the end of next year, setting the stage for a total of 150 basis points in cuts over the next two years.
If realized, these cuts would translate to a potential loss of $1.875 billion in annual interest income for stablecoin issuers over the next two years. However, the actual impact may vary depending on several factors, including the pace and magnitude of interest rate cuts, the stablecoins' reserve composition, and any adjustments made by stablecoin issuers in response to the changing interest rate environment.
Some speculate that lower interest rates could eventually push stablecoin providers and other financial institutions into riskier assets in an effort to earn a return on their reserves.
"With lower yields on safer assets, institutions often shift their focus toward 'risk-on' assets," wrote Andrei Terentiev, Director of Engineering at Bitcoin.com, in a post on the platform X. "Think stocks, crypto, and other investments that offer higher potential returns but come with greater risk," he added.
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