Stablecoin Interest Income The US Federal Reserve has just cut its interest rates for the first time since March 2020. And with that comes a blow to the income of major centralized stablecoins. According to a report by CCData released on September 27, the top five stablecoins holding combined assets worth almost $125 billion in US Treasury bills could lose up to an amount of around $625 million in interest income for each rate cut of 50 bps.
The stablecoins with the most usage are USDC, USDT, and DAI, which have reserves underpinning them with the majority of this reserve in U.S. Treasury bills in this case. These reserves earn interest for the issuers of stablecoin, which is a big source of revenue since it’s very highly generated. The CCData report shows that Treasury bills make up 80.2% of reserves for major stablecoins. Lowered interest from the Federal Reserve cuts earnings on those Treasury bills, reducing revenue of the stablecoin as well.
Stablecoin Interest Income in View as Fed Slashes Rates
Stablecoin Interest Income With the Fed now cutting rates, stablecoins just took a big hit to their interest income. The market fully expects further rate cuts, and by the end of 2024, CME Group’s FedWatch tool puts together 75 bps of rate reductions: 50 bps of those in November and another 25 bps in December.Stablecoin Interest Income
As their predictions come to pass, stablecoins are at risk of forgoing an additional $937.5 million in interest income. The total loss to the Fed cuts would then be at $1.5625 billion. As stated in the report, a slight rate cut will have a considerable effect on stablecoins because these, in general, hold significant volumes of Treasury bills.
Which stablecoins are most affected?
Stablecoin Interest Income Tether’s USDT is the most impacted among the major stablecoins. Among these, it holds the highest share of Treasury-backed reserves at around $93.2 billion in the form of U.S. Treasury bills and repurchase agreements. For the first half of 2024, Tether reportedly netted $5.2 billion in profit, mainly due to higher interest rates. This sort of decline in interest rates would eat into its profit and may even decrease further earnings for the future.Stablecoin Interest Income
Following Tether, Circle’s USD Coin (USDC) holds $28.7 billion in U.S. Treasury holdings through its Circle Reserve Fund. Other stablecoins like First Digital USD (FDUSD), PayPal USD (PYUSD), and TrueUSD (TUSD) hold much smaller amounts of Treasury reserves: $1.83 billion, $634 million, and $502 million, respectively. Although the deposits are smaller, the rate cuts will still affect their revenues, especially since interest income from Treasury bills accounts for a major share of their earnings for those stablecoins.
Resilience of the Market Under Financial Pressure
The stablecoin market has held up relatively well against critical financial losses related to the Federal Reserve’s rate cuts. The total market cap of stablecoins grew 1.50% in September 2024 to $172 billion. This will be the 12th month in a row with growth in the sector. However, the total market cap still lags pre-May 2022 levels, when the Terra Luna depegging occurred.
The market cap has been growing; however, the volumes on centralized exchanges have been going in the other direction. As of September 23, 2024, they had retreated by 39.4% to $683 billion. The total market remains largely dominated by USDT, which commands 77.2% of volume traded on centralized exchanges Stablecoin Interest Income. FDUSD ranks as the second most traded stablecoin with an 11.6% market share, followed by USDC with its 10.9% share of the market.
Impact of Future Rate Cuts
The worst sufferer will be the stablecoins if rate cuts are expected in the near future. Stablecoin issuers draw a significant interest income by holding Treasury bills in their coffers. As 80.2% of the reserves are invested in Treasury bills, if the rate cuts take place, then interest earned on Treasury bills will raise less for the issuers. In turn, they suffer directly in terms of the bottom line and profit margin.
Assuming the case of Tether, which has enjoyed high rates, the rate cut would be a huge loss in earnings. For example, if the Federal Reserve slashes rates by 50 bps in November and another 25 bps in December, Tether’s interest income may fall sharply Stablecoin Interest Income , cutting extremely into its profits recorded early this year, 2024.
This would likely further reduce the earnings of USDC along with other stablecoins like FDUSD, PYUSD, and TUSD. Other reserve holdings are lower than Tether’s, but their interest earned by these stablecoins mainly relies on their earnings. The reduction in interest rates would further reduce their returns on their reserve funds and, therefore, also the margins of profit.
Global Trends in Stablecoin Markets
In other parts of the world, while stablecoins in the United States prepare for losses in revenues, these pieces are moving ahead with new stablecoin projects. A good example is Japan, where the three biggest megabanks are collaborating in a pilot project to accelerate cross-border settlements through stablecoins. The primary basis of Project Pax will be enjoying Progmat’s support in a blockchain platform; backed by SBI Holdings and Japan Exchange Group are the stablecoins it issues.
Those banks will include Mitsubishi UFJ Financial Group (MUFG), Sumitomo Mitsui Banking Corporation (SMBC), and Mizuho. Blockchain companies Datachain and TOKI will also take part, which will experiment in cross-chain technology for faster transactions.
The CEO of Ripple, Brad Garlinghouse, more recently publicly announced that the company is preparing to release a stablecoin in Japan shortly. Ripple issued this announcement amidst growing global interest in stablecoins as a means of improving international financial transactions.
Conclusion
The impact of rate cuts by the Federal Reserve on the stablecoin market will have long-lasting effects. Since major holders hold large holdings in U.S. Treasury bills, stablecoins such as Tether, USDC, and other stablecoins face the potential loss of substantial interest income in the face of rate cuts. It is calculated that the total potential loss could amount to $1.5625 billion by year-end 2024.
The stablecoin market, meanwhile, proved resilient in growing market capitalization but is still challenged by interest income loss on profitability. Meanwhile, however, and in contrast, it’s interesting to see how global initiatives on stablecoins, such as Japan’s cross-border settlement, suggest that even financial headwinds from falling interest rates will not eliminate stablecoins from the future of finance.
