The Federal Reserve’s recent interest rate cuts are expected to reduce revenue for stablecoin issuers, according to a report from the cryptocurrency industry. Stablecoin providers, who hold significant amounts of U.S. Treasurys as reserves to back their digital assets, could see a sharp decline in interest income as rates fall.
With nearly $125 billion in U.S. Treasurys held by stablecoin issuers, each 50 basis point (bps) cut by the Fed could result in a $625 million decrease in annual interest income. The Fed anticipates a 50 bps cut by year-end, with an additional 100 bps reduction projected by the end of next year.
Why Rate Cuts Impact Stablecoin Providers Stablecoins, which are cryptocurrencies pegged to a stable asset like the U.S. dollar, rely on reserves such as U.S. Treasurys to maintain their value. Issuers like Tether (USDT) and Circle (USDC) have benefited from higher interest rates in recent years, as the yields on their Treasury holdings increased. U.S. Treasurys account for over 80% of the reserves held by stablecoin providers, with Tether alone holding $93.2 billion in U.S. debt.
As the Fed cuts rates, the profits from these Treasury holdings are expected to decline significantly. For example, Tether generated $5.2 billion in profit in the first half of 2024, largely due to its Treasury investments.
Potential Shift Toward Riskier Assets Andrei Terentiev, Director of Engineering at Bitcoin.com, suggested that lower interest rates might prompt stablecoin issuers to explore riskier assets to maintain returns. He noted that as yields on safer investments like Treasurys decrease, institutions might turn to riskier options, such as stocks, cryptocurrencies, and other high-return, high-risk investments.
The report highlights that continued rate cuts could force stablecoin providers to reassess their reserve strategies in an effort to preserve profitability.