Fed Rate Cuts Signal Potential Boom for DeFi and Stablecoins — Fidelity

LUCKNOW (CoinChapter.com) — Financial services giant Fidelity released its 2024 Digital Assets Outlook report on Jan. 13. The report anticipated that interest rate cuts by the US Federal Reserve could renew major institutional interest in decentralized finance (DeFi) platforms and stablecoins this year.

Fidelity explains that in 2023, they expected institutions to invest heavily in the high yields offered by DeFi platforms. However, as the Fed aggressively hiked interest rates over the past year, institutions opted for safer fixed-income products. 

DeFi has been perceived as too risky and difficult to use, with vulnerabilities to hacks and exploits. These issues have led institutional investors to carefully “scrutinize the risks associated with smart contracts,” the report states, adding:

“In the prevailing risk-off environment, institutions deemed the mid-single digit returns offered by DeFi yield to be too low for the associated risk of experimenting with smart contracts.”

Fidelity’s Optimistic Vision for DeFi Yields in 2024

However, with the Fed projected to cut rates in 2024, Fidelity believes institutional investors may once again find DeFi yields more attractive compared to shrinking yields on traditional finance (TradFi) products. This renewed interest depends on a more robust DeFi infrastructure and emerging platforms to reduce risk and complexity for institutional users.  

Fidelity also anticipates corporations will become more willing to hold digital assets on their balance sheets in 2024. New accounting rules brought by the US Financial Accounting Standards Board allowed companies to report unrealized crypto losses and gains, reducing an obstacle to institutional adoption.

Surging Institutional Interest in Stablecoins

In addition, Fidelity expects a major catalyst for crypto adoption this year: the institutional exploration of stablecoins, especially dollar-pegged cryptocurrencies. It brings legitimacy as traditional finance firms experiment with stablecoins for use cases like settlements. Payments, remittances, and international trade will likely see stablecoin use surging in 2024 as users seek faster, cheaper transactions. 

Regulatory clarity may also increase, further enabling institutional stablecoin activity. Fidelity believes top stablecoins like Tether and USD Coin will maintain dominance as the sector sees accelerated growth, especially if the Fed cuts rates as projected. 

“It is expected that this market area continues to gain traction throughout 2024, potentially more so if anticipated Federal Reserve interest rate cuts occur,” Fidelity predicted.

Stablecoins have become the cryptocurrency industry’s backbone, bridging traditional finance and digital assets. As William Quigley, co-founder of leading stablecoin Tether, stated, “Stablecoins have become the foundation of the cryptocurrency market.”

“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%.”