Fed rate cuts could be a boon for DeFi and stablecoins: Fidelity

An anticipated Federal Reserve interest rate cut in the United States could renew major institutions’ interest in decentralized finance (DeFi) and stablecoins — as long as the infrastructure develops further this year, says asset manager Fidelity.

In its 2024 Digital Assets Look Ahead report released Jan. 13, Fidelity said while it expected institutions to dive into DeFi for their yields last year, this didn’t end up happening as Fed rate hikes pushed them to move into “perceived to be safer,” traditional fixed-income products.

DeFi platforms have previously been regarded as having hard-to-use interfaces and have been perceived as being susceptible to hacks and exploits —  which have caused institutions to “scrutinize the risks associated with smart contracts.”

“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.”

However, it said 2024 could see institutions have “renewed interest” for DeFi yields if they “once again become more attractive than TradFi yields and more developed infrastructure emerges.”

Fidelity also expects corporations may get “more comfortable with the idea of putting digital assets on their balance sheet” after updated rules from the United States Financial Accounting Standards Board (FASB) allowed companies to report both paper losses and gains from their crypto holdings.

Institutions to explore stablecoins

In a section on stablecoins, Fidelity predicted institutional exploration of the dollar-pegged assets would be “the greatest potential catalyst” of adoption this year.

It said TradFi firms exploring the use of stablecoins for purposes such as settlements could “bring legitimacy” to them and expected “payments, remittances, and international trade” as the three main sectors to see increased stablecoin adoption as users hunt for faster and cheaper payment methods.

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It added it was “likely that regulatory frameworks will become clearer, providing more certainty” and predicted that Tether (USDT) and USD Coin (USDC) won’t lose any ground in 2024.

“It is expected that this area of the market continues to gain traction throughout 2024.” Fidelity wrote. “Potentially more so if anticipated Federal Reserve interest rate cuts occur.”

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