Key Takeaways
- The Federal Reserve’s recent decision to cut interest rates will lead to lower revenue for stablecoin issuers, according to a new cryptocurrency industry report.
- Issuers of stablecoins have held U.S. Treasurys as a way to earn a return on the reserves backing the digital assets they issue.
- Stablecoin providers hold nearly $125 billion of U.S. Treasurys, and each 50 bps rate cut is expected to lead to a $625 million drop in annual interest income derived from these assets.
- If rates continue to fall, as expected, stablecoin providers may need to look into alternative reserves to back their digital assets, a crypto industry executive forecast.
Stablecoin issuers could be looking at lower income as the Federal Reserve (Fed) kicked off its first rate cut cycle since 2020.
Each 50 basis point cut by the Fed could lead to a $625 million drop in total annual interest income for stablecoin issuers, according to a new report from digital asset data provider CCData.
Those hits could quickly add up as the Fed itself 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 A Rate Cut Affect Stablecoins?
Stablecoins are cryptocurrencies whose value is pegged to another cryptocurrency. Some of the most popular stablecoins have their value pegged to the U.S. dollar and keep a reserve in cash or equivalent investments—often U.S. Treasurys—to maintain that peg.
Centralized stablecoin providers, such as Tether (USDTUSD) and Circle (USDCUSD), have relied heavily on their holdings of U.S. Treasurys earning interest over the past few years as high interest rates drove up Treasury yields.
U.S. Treasurys make up the vast majority of reserves held by stablecoin issuers, at just over 80%. This amounts to holdings of nearly $125 billion worth of Treasurys.
Tether, the largest stablecoin by market cap, alone holds $93.2 billion worth of U.S. debt, which accounted for much of that digital asset company’s $5.2 billion of profits in the first half of 2024, the CCData report said.
Bitcoin.com Director of Engineering Andrei Terentiev speculated on social media 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,” Terentiev posted on the platform X. “Think stocks, crypto, and other investments that offer higher potential returns but come with greater risk,” he wrote.