Federal Reserve’s Rate Cut Could Spark Institutional Interest in DeFi and Stablecoins, Fidelity Predicts

The United States Federal Reserve’s potential interest rate cut could reignite major institutional interest in decentralized finance (DeFi) and stablecoins, according to asset manager Fidelity.

In their recently released 2024 Digital Assets Look Ahead report, Fidelity suggests that this resurgence is contingent on the further development of DeFi infrastructure throughout 2024.

Fidelity had previously anticipated institutional forays into DeFi due to its attractive yields in 2023, which did not materialize as expected.

Instead, institutional investors were driven towards traditional fixed-income products due to Federal Reserve rate hikes, which were perceived as a safer bet in a risk-averse environment.

DeFi Platforms Plagued by Complex User Interfaces and Vulnerabilities

DeFi platforms had long been plagued by complex user interfaces and susceptibility to hacks, causing institutions to carefully assess the risks associated with smart contracts.

In the risk-off environment, the mid-single digit returns offered by DeFi were deemed too modest compared to the perceived risks of experimenting with smart contracts.

Nonetheless, Fidelity believes that 2024 may see institutions rekindle their interest in DeFi yields if they become more attractive than traditional finance (TradFi) yields once again, coupled with the emergence of more advanced infrastructure.

Fidelity also anticipates that corporations will become more open to the idea of adding digital assets to their balance sheets.

The shift comes as updated rules from the United States Financial Accounting Standards Board allow companies to report both paper losses and gains from their crypto holdings.

Institution Interest in Stablecoins is Growing: Fidelity

In addition to DeFi, Fidelity’s report highlights the growing interest in stablecoins among institutional players.

The report suggests that the exploration of U.S. dollar-pegged stablecoins will be a significant catalyst for adoption in 2024.

Traditional finance companies exploring the use of stablecoins, particularly for settlement purposes, could lend legitimacy to these assets.

Fidelity predicts that payments, remittances, and international trade will be the three main sectors to witness increased stablecoin adoption as users seek faster and more cost-effective payment solutions.

Furthermore, the report expects that regulatory frameworks surrounding stablecoins will become clearer, providing greater certainty.

Fidelity remains bullish on stablecoins such as Tether ( USDT) and USD Coin ( USDC), suggesting they are unlikely to lose ground in 2024. 

In fact, Fidelity suggests that this segment of the market will continue to gain traction throughout the year, potentially accelerating further if the Federal Reserve implements anticipated interest rate cuts.

In November last year, the 90-day net change in the supply of the top four stablecoins, Tether, USDC, Binance USD (BUSD), and Dai (DAI), turned positive, marking first such instance since the collapse of Terra in mid-May 2022.

“This week, the 90-day change in aggregated stablecoin supplies flipped positive for the first time in 1.5 years,” Reflexivity Research said at the time.

Stablecoins remain key to the day-to-day operations of the cryptocurrency industry, acting as a bridge between traditional finance and cryptocurrencies.

“Stablecoins have become the foundation of the cryptocurrency market,” William Quigley, one of the co-founders of Tether, told Cryptonews.

“Stablecoins are the core ingredient in virtually all DeFi applications. Without stablecoins, overall trading volume and liquidity in the crypto market would likely drop 75%.”