The United States Federal Reserve’s recent move to cut interest rates, marking its first rate reduction since March 2020, is poised to significantly impact the income streams of the five largest centralized stablecoins. According to a report from CCData, released on September 27, these stablecoins collectively hold approximately $125 billion in U.S. Treasury bills, with an estimated loss of $625 million in interest income for every 50-basis-point (bps) rate cut by the Fed.
Stablecoins’ Treasury Exposure and Impact of Rate Cuts
The report highlights that Treasury bills make up 80.2% of the reserve assets held by these top stablecoins, meaning that any reduction in interest rates directly impacts their revenue. As such, the expected decline in rates will reduce the interest income these stablecoins generate from their Treasury holdings.
Market Predicts 75bps Rate Cuts by Year-End
According to data from the CME Group’s FedWatch tool, the market expects the Fed to introduce a total of 75 bps in rate cuts by the end of 2024. This includes a 50-bps cut in November, followed by an additional 25-bps reduction in December. If these predictions hold true, stablecoins could face an additional $937.5 million in lost revenue, with the total projected loss from the Fed’s easing policies reaching $1.5625 billion.
Tether and Circle Among the Most Affected
Tether’s USDT, the largest stablecoin by market cap, is particularly exposed, with $93.2 billion held in Treasury-backed reserves and repurchase agreements. Tether reported a net profit of $5.2 billion in the first half of 2024, largely attributed to elevated interest rates. The upcoming cuts could put pressure on these profit margins.
Circle’s USD Coin (USDC) is the second largest, holding $28.7 billion in Treasury securities through its Circle Reserve Fund. Other stablecoins like First Digital USD (FDUSD), PayPal USD (PYUSD), and TrueUSD (TUSD) also maintain smaller Treasury positions of $1.83 billion, $634 million, and $502 million, respectively, making them vulnerable to the impending rate cuts.
Stablecoin Market Resilience Amid Potential Setbacks
Despite the anticipated financial pressure, the stablecoin market remains resilient. CCData’s report shows that the total market capitalization of stablecoins increased by 1.50% in September, reaching $172 billion. This marks the 12th consecutive month of growth, even though the overall market cap is still below the levels seen before the Terra Luna depegging event in May 2022.
Trading Volume Declines, but USDT Retains Dominance
On the trading front, centralized exchange volumes for stablecoins have dropped by 39.4%, falling to $683 billion as of September 23. However, Tether (USDT) continues to dominate, accounting for 77.2% of all stablecoin trading volume on centralized platforms. FDUSD is the second most traded stablecoin with an 11.6% market share, while USDC follows closely behind with 10.9%.
Japan’s Megabanks to Pilot Cross-Border Stablecoin Transfers
In related news, Japan’s three largest megabanks—Mitsubishi UFJ Financial Group (MUFG), Sumitomo Mitsui Banking Corporation (SMBC), and Mizuho—are launching a pilot project aimed at improving cross-border payments using stablecoins. Dubbed “Project Pax,” the initiative will involve stablecoins issued by Progmat, a blockchain platform supported by SBI Holdings and Japan Exchange Group. The trial aims to explore cross-chain technology to facilitate faster, more efficient international settlements.
Meanwhile, Ripple CEO Brad Garlinghouse has disclosed that the company is preparing to launch its own stablecoin in Japan, underscoring the growing global interest in stablecoins as a tool for international finance.
