The recent decision by the United States Federal Reserve to cut interest rates for the first time since March 2020 is expected to impact the income streams of the top five centralized stablecoins. These stablecoins collectively hold nearly $125 billion in U.S. Treasury bills and could potentially lose approximately $625 million in interest income for each 50-basis-point rate cut. With Treasury bills constituting 80.2% of their reserves, any reduction in interest rates directly affects their revenue. Market predictions suggest a total of 75 bps in rate cuts by the end of 2024, with stablecoins potentially facing an additional revenue loss of $937.5 million if these predictions materialize.
Among the affected stablecoins, Tether’s USDT holds the largest share of Treasury-backed reserves, with $93.2 billion in T-bills and repurchase agreements. Tether reported a net profit of $5.2 billion in the first half of 2024, primarily driven by higher interest rates. Other stablecoins such as Circle’s USD Coin (USDC), First Digital USD (FDUSD), PayPal USD (PYUSD), and TrueUSD (TUSD) hold smaller Treasury positions ranging from $502 million to $28.7 billion. The expected decline in interest rates is likely to put additional pressure on their profit margins as well.
Despite the potential financial setbacks, the stablecoin market has shown resilience. In September, the total market capitalization of stablecoins increased by 1.50% to reach $172 billion, marking the 12th consecutive month of growth. However, the overall market cap remains below pre-May 2022 levels, prior to the Terra Luna depegging event. Trading volumes on centralized exchanges have also seen a downturn, falling by 39.4% to $683 billion as of September 23. USDT continues to dominate the stablecoin market, accounting for 77.2% of all trading volume on centralized exchanges, followed by FDUSD and USDC.
Japanese megabanks are set to trial cross-border stablecoin transfers in a pilot project called “Project Pax.” The initiative involves stablecoins issued by Progmat, a blockchain platform supported by SBI Holdings and Japan Exchange Group. The participating banks include Mitsubishi UFJ Financial Group (MUFG), Sumitomo Mitsui Banking Corporation (SMBC), and Mizuho. This trial, which also involves blockchain companies Datachain and TOKI, aims to explore the use of cross-chain technology for faster and more efficient transactions. Additionally, Ripple’s CEO Brad Garlinghouse has revealed that the company is working on launching a stablecoin in Japan.
In conclusion, the recent interest rate cuts by the Federal Reserve are expected to impact the revenue streams of major centralized stablecoins, potentially resulting in significant losses. While stablecoins continue to show resilience in the market with overall capitalization growth, declining interest rates pose challenges to their profit margins. Japanese megabanks are exploring cross-border stablecoin transfers, demonstrating the growing interest in leveraging blockchain and stablecoin technology for international settlements. These developments highlight the evolving landscape of the stablecoin market and the need for adaptation to economic changes and technological advancements.
