The US Federal Reserve’s (Fed) interest rate cut may be great news for Bitcoin and stocks, but it threatens to undermine the relative stability of the stablecoin market.
You see, stablecoins are heavily backed by US Treasury bonds, which currently hold over $120 billion in bonds, making them the 18th largest holding. Tether (USDT) and USD Coin (USDC) are the two largest stablecoins in the world, holding 70% and 21% of the market, respectively.
These coins have become an important part of the financial system. As Bernstein puts it, they are “systemically important.”
The US Fed and stablecoins
When the Fed cuts interest rates, stablecoin issuers are happy. They offer their products for free to users, keeping all the interest from the bonds for themselves.
But when interest rates fall, so do their earnings. These issuers are then cornered. Interest rates control their entire profit margins, and the lower the interest rates, the more desperate stablecoin companies become to find money elsewhere.
The Fed’s decision to cut could force Tether and the rest of the companies to charge fees they have avoided so far, such as minting or burning tokens, or even fees for using stablecoins in transactions. This would take away some of the main benefits of using stablecoins in the first place.
The appeal of stablecoins lies in their low fees and ease of use. But with interest revenue dwindling, issuers may have no choice but to pass on the costs to users, and that’s bad news for anyone using these tokens.
Companies prepare for change
Stablecoin companies are preparing for such changes. Circle CEO Jeremy Allaire said lower interest rates would increase investment and economic activity, which could be good for their business.
He pointed out that as interest rates fall, capital will be put to work faster, increasing demand for stablecoin technology.
USDC, which already has the world’s highest velocity of money, could see demand rise as people look for faster, cheaper ways to move money. However, Tether CEO Paolo Ardoino said:
“If we see the Fed continue to ease, I expect there will be capital inflows into the crypto market as investors look for higher returns and diversification away from fiat currencies.”
Meanwhile, U.S. regulators continue to crack down on crypto companies. So far this year, they have collected more than $19 billion in settlements, nearly two-thirds of which came from cryptocurrency-related cases.
FTX and the now-defunct Alameda Exchange accounted for $12.7 billion of that total, which was transferred to the U.S. Commodities and Futures Trading Commission (CFTC) under a settlement reached in August.
In 2024, settlement payments are up 78% from 2023, when they totaled just $10.87 billion. The increase is even more impressive than in 2022, when they totaled more than 8,327%. But that’s just part of the picture.
Terraform Labs paid $4.47 billion to settle with the U.S. Securities and Exchange Commission (SEC). Genesis also paid $2 billion to the Office of the Attorney General (OAG) after filing for bankruptcy in January 2023.
