The Federal Reserve's recent decision to cut interest rates for the first time since March 2020 is poised to have significant implications for the revenue streams of the leading centralized stablecoins, which collectively manage assets close to $125 billion in US treasury bills. This shift in monetary policy is critically important for investors and financial analysts alike, as it indicates changing dynamics in the stablecoin market. A report released by index provider CCData on September 27 illustrates that treasury bills comprise a staggering 80.2% of the reserves held by major stablecoins.
With the market anticipating a loss of around $625 million in interest income for every 50-basis point (bps) rate cut, the potential ramifications are profound. Current data from CME Group's FedWatch tool indicates that traders are factoring in a 75-bps rate cut by the end of 2024, including an immediate 50-bps cut in November, followed by an additional 25 bps in December.
If these predictions hold, the cumulative effect could result in a revenue loss of approximately $937.5 million, amplifying the total expected loss from the Fed’s easing policy to around $1.5625 billion. Tether’s USDt (USDT) stands as the largest stablecoin issuer, with reserves entailing $93.2 billion in T-bills and repurchase agreements.
Notably, this entity reported an impressive net profit of $5.2 billion in the first half of 2024, a figure primarily fueled by interest rates. Following Tether, Circle’s USD Coin (USDC) is far behind, with $28.7 billion in treasury holdings held in its Circle Reserve Fund. Other players in this competitive landscape, such as First Digital USD (FDUSD), PayPal USD (PYUSD), and TrueUSD (TUSD), maintain smaller treasury asset amounts at $1.83 billion, $634 million, and $502 million respectively.
A decrease in interest rates will undoubtedly exert additional pressure on the profit margins of these stablecoins. In September, stablecoins exhibited a 1.50% increase in total market capitalization, reaching an impressive $172 billion, marking the twelfth consecutive month of growth. Despite this positive momentum, it is essential to recognize that the overall market cap still lags behind pre-Terra Luna depegging levels from May 2022.
Trading volumes have seen a substantial decline on centralized exchanges, dropping 39.4% to $683 billion as of September 23, which could indicate a downward trend in monthly trading activity. Historically, September signals the end of seasonality effects and initiates increased trading activity, a notion highlighted by the recent CCData report. Currently, USDT dominates the centralized exchange landscape, representing a remarkable 77.2% of all trading volume.
Following closely is FDUSD, which claims an 11.6% market share, while USDC accounts for 10.9% of the total trading volume. This competitive landscape underscores the need for continuous monitoring and analysis of stablecoin performance in light of the Federal Reserve's monetary policy adjustments as they continue to shape the financial ecosystem..