According to a recent report from the cryptocurrency sector, the decision by the Federal Reserve to reduce interest rates will decrease the income of stablecoin issuers.
Stablecoin Issuers and Their Financial Strategies
U.S. Treasurys have been held by issuers of stablecoins as a strategy to generate returns on reserves backing the digital assets they distribute. Presently, these issuers possess nearly $125 billion in U.S. Treasurys. Each 50 basis points cut in rates is anticipated to cause a $625 million diminution in yearly interest revenue from these holdings.
As the trend of decreasing interest rates continues, stablecoin issuers might need to explore other reserve options to support their digital assets, as suggested by a cryptocurrency industry leader. The Federal Reserve’s initiation of its first interest rate reduction cycle since 2020 could mean that stablecoin issuers are potentially staring at reduced earnings.
Impact of Interest Rate Cuts on Earnings
The cumulative annual interest income might decline by $625 million per each 50 basis point reduction by the Fed, with potential further cuts culminating in an overall 50 basis point reduction by this year’s end, and reaching another 100 basis point by the end of the following year.
The Nature of Stablecoins
Cryptocurrencies pegged to another currency, stablecoins often have their value tied to the U.S. dollar, maintaining reserves in cash or similar investments like U.S. Treasurys to sustain this peg. Centralized stablecoin providers have leveraged high interest rates in recent years to capitalize on increasing Treasury yields.
Comprising over 80% of reserves, stablecoin issuers primarily hold U.S. Treasurys, accumulating to around $125 billion in treasury holdings. They engage in this practice to achieve a return on their reserve assets.
Market Dynamics for Stablecoin Issuers
“Institutions tend to pivot their focus toward ‘risk-on’ assets amid lower yields on safer alternatives,” noted Terentiev on platform X. He elaborated, “Consider investments like stocks, cryptocurrencies, and other ventures that promise greater returns but inherently involve higher risks.”
