Renewed interest in DeFi and stablecoins expected as Federal Reserve considers interest rate cut

A recent report released by asset manager Fidelity stated that an anticipated interest rate cut by the Federal Reserve in the United States could rekindle the interest of major institutions in decentralized finance (DeFi) and stablecoins. However, this renewed interest hinges on the further development of the infrastructure in the DeFi space this year.

Fidelity noted that they had expected institutions to embrace DeFi in pursuit of higher yields in the previous year. However, this anticipation did not materialize as expected. 

The Federal Reserve’s rate hikes pushed these institutions toward what they perceived as safer havens, namely traditional fixed-income products. The fear of rising interest rates prompted many to opt for more conventional investments.

DeFi’s challenges and risk assessment

One of the reasons institutions hesitated to dive into DeFi was the perceived complexity and risk associated with decentralized platforms. DeFi platforms were criticized for their hard-to-use interfaces and susceptibility to hacks and exploits. 

These factors led institutions to scrutinize the risks associated with smart contracts, ultimately causing them to deem the mid-single-digit returns offered by DeFi insufficient to justify the associated risks.

Despite the setbacks in 2023, Fidelity believes that 2024 might witness a resurgence of institutional interest in DeFi yields.

This renewed interest will depend on whether decentralized finance yields become more attractive than traditional financial yields and if the infrastructure supporting decentralized finance platforms continues to mature. Fidelity suggests that if these conditions are met, institutions may again consider decentralized finance a viable investment option.

Fidelity’s report also anticipates corporations becoming more comfortable adding digital assets to their balance sheets.

This expectation is fueled by updated rules from the United States Financial Accounting Standards Board (FASB), which allow companies to report both paper losses and gains from their cryptocurrency holdings. This regulatory clarity will likely encourage more corporations to explore and embrace digital assets.

Stablecoins: A catalyst for adoption

In the realm of stablecoins, Fidelity predicts that institutional exploration of dollar-pegged assets could be a significant catalyst for adoption in 2024. 

Traditional financial firms exploring using stablecoins for purposes such as settlements could lend legitimacy to these digital assets. Fidelity expects increased adoption of stablecoins in payments, remittances, and international trade as users seek faster and cheaper payment methods.

Fidelity also foresees a positive trajectory for stablecoins in 2024, with regulatory frameworks becoming clearer, providing greater certainty to market participants. 

Despite the growing competition in the stablecoin space, Fidelity predicts that Tether and USD Coin (USDC) will unlikely lose ground this year. These two leading stablecoins are expected to maintain their dominance, especially if the Federal Reserve proceeds with anticipated interest rate cuts.