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The United States Federal Reserve recently made a pivotal decision to cut interest rates for the first time since March 2020. This move is expected to significantly affect the income streams of the top five centralized stablecoins in the market.
Impact on Centralized Stablecoins
According to a report published by CCData on September 27, these major stablecoins collectively hold nearly $125 billion in U.S. Treasury bills. A 50-basis-point (bps) cut in interest rates could lead to an estimated loss of approximately $625 million in interest income for each stablecoin. The report highlights that Treasury bills make up a substantial 80.2% of the reserves held by these prominent stablecoins, meaning any reduction in interest rates directly impacts their revenue streams.
Projected Future Rate Cuts
Looking ahead, market predictions suggest that the Federal Reserve may implement a total of 75 bps in rate cuts by the end of 2024. This forecast includes a potential 50-bps decrease in November followed by an additional 25 bps in December. If realized, these anticipated cuts could further strain the earnings of stablecoins, leading to an additional revenue loss estimated at $937.5 million. Combined with the initial losses, the total potential impact on these stablecoins could reach an alarming $1.5625 billion.
Leading Stablecoins and Their Reserves
Among the stablecoins significantly impacted, Tether’s USDT holds the largest amount in Treasury-backed reserves, totaling around $93.2 billion in T-bills and repurchase agreements. Tether reported a net profit of $5.2 billion in the first half of 2024, largely fueled by the previously elevated interest rates. Following Tether, Circle’s USD Coin (USDC) has $28.7 billion in Treasury holdings managed through its Circle Reserve Fund. Other notable stablecoins include First Digital USD (FDUSD), PayPal USD (PYUSD), and TrueUSD (TUSD), with smaller Treasury positions of $1.83 billion, $634 million, and $502 million, respectively. The anticipated decline in interest rates may further pressure their profit margins.
Resilience of the Stablecoin Market
Despite these looming financial challenges, the stablecoin market has demonstrated resilience. In September, the total market capitalization for stablecoins increased by 1.50%, reaching $172 billion, marking the 12th consecutive month of growth, according to CCData. However, it’s important to note that this figure still remains below the pre-May 2022 levels, which experienced a significant downturn following the Terra Luna depegging event. Additionally, trading volumes on centralized exchanges have declined by 39.4%, totaling $683 billion as of September 23. Notably, USDT continues to be the leading stablecoin, accounting for 77.2% of all trading volume on these platforms, followed by FDUSD with an 11.6% market share and USDC at 10.9%.
Advancements in Stablecoin Technology
In an exciting development, Japan’s top three megabanks are launching a pilot project designed to enhance international settlements using stablecoins. Named “Project Pax,” this initiative will involve stablecoins issued by Progmat, a blockchain platform backed by SBI Holdings and the Japan Exchange Group. The participating banks include Mitsubishi UFJ Financial Group (MUFG), Sumitomo Mitsui Banking Corporation (SMBC), and Mizuho. This trial, which also engages blockchain firms Datachain and TOKI, aims to explore cross-chain technology to facilitate faster and more efficient transactions. Additionally, Ripple’s CEO Brad Garlinghouse has announced plans to launch a stablecoin in Japan soon, hinting at further developments in this space.
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