Federal Reserve’s rate cuts could shake stablecoins’ stability

The Federal Reserve’s rate cuts could be great news for Bitcoin and stocks, but they are threats that could tamper with the stablecoin market’s relative stability.

You see, stablecoins are heavily backed by U.S. Treasurys. Right now, they hold over $120 billion in Treasurys, making them the 18th-largest holder. 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 a critical part of the financial system, as stated by Bernstein, which now sees them as “systemically important.”

Fed and stablecoins

When the Fed slashes rates, stablecoin issuers feel it right in their wallets. They make their product free for users, keeping all the interest from Treasurys for themselves.

But when those rates drop, so does their income. These issuers are then backed into a corner. Rates control their entire profit margin, and the lower those rates go, the more desperate stablecoin companies become to make money elsewhere.

The Fed’s cuts could lead Tether and the rest to charge fees they’ve avoided so far. That might mean fees to mint or burn tokens, or even fees to use the stablecoins in transactions. This would strip away some of the key benefits of using stablecoins in the first place.

The appeal of stablecoins lies in their low costs and ease of use. But with interest revenue dwindling, issuers may not have any choice but to pass the costs on to users, and that’s bad news for anyone using these tokens.

Companies brace for change

Stablecoin companies are preparing for these changes. Jeremy Allaire, Circle’s CEO, said lower interest rates would increase investment and economic activity, which could be good for their business.

He pointed out that as rates drop, capital will be put to work faster, increasing demand for stablecoin technology.

USDC, which already has the highest velocity of money in the world, could see increased demand as people look for faster, cheaper ways to move funds. Tether CEO Paolo Ardoino, however, said that:

“If we see continued easing from the Fed, I anticipate an influx of capital into crypto markets as investors seek higher yields and diversification away from fiat currencies.”

Meanwhile, U.S. regulators continue coming down hard on crypto companies. So far this year, they’ve collected over $19 billion in settlements, with nearly two-thirds coming from crypto-related cases.

Defunct FTX and its trading firm Alameda account for $12.7 billion of this total. That money went to the Commodity and Futures Trading Commission (CFTC) as part of a settlement reached in August.

2024 has seen an increase of 78% in settlement payments compared to 2023, which only raked in $10.87 billion. This uptick is even more dramatic compared to 2022, with an 8,327% increase in settlement values. But that’s just part of the picture.

Terraform Labs paid $4.47 billion to settle with the Securities and Exchange Commission (SEC). Genesis also shelled out $2 billion to the Office of the Attorney General (OAG) after filing for bankruptcy in January 2023.