Crypto - Stablecoins and DeFi will explode thanks to the Fed's reductions.

A potential interest rate cut by the FED in 2024 could lead to an influx of institutional investors towards decentralized finance (DeFi) applications and stablecoins. This was highlighted in a study published by asset manager Fidelity. If traditional rates fall, DeFi yields will once again become attractive to crypto investors seeking gains.

Institutional Interest in DeFi Yields

According to Fidelity, institutions might have been interested in the yields offered by DeFi protocols and cryptocurrencies in 2023. However, due to rate hikes by the Fed, they opted to turn to traditional bond products, considered safer.

With yields in single digits, DeFi gains seemed too low considering the perceived risks: complex interfaces, security vulnerabilities, smart contracts, etc.

But in 2024, the scenario could reverse if the Fed eases its monetary policy. With traditional rates falling, DeFi yields would become competitive again. Consequently, institutions might be tempted to invest capital in them.

This assumes, however, advancements in terms of security and user-friendliness of DeFi platforms. Infrastructure improvements will be crucial to reassure crypto investors about the reliability of smart contracts. With enhanced safety nets, risks would become more acceptable.

Stablecoins as a Potential Entry Point 

According to Fidelity, the adoption of stablecoins could also serve as a channel for institutional entry into the crypto market this year. Their use for settlement or cross-border payments is generating growing interest.

As a digital version of traditional currencies such as the dollar, stablecoins reassure with their low volatility. Their deployment by “TradFi” players would contribute to their legitimization.

Fidelity anticipates regulatory progress around stablecoins in 2024. Clear legal frameworks would provide more guarantees to potential crypto users. Leaders Tether and USD Coin could be further strengthened.

The interest is expected to come especially from the payments sector. Stablecoins have the potential to speed up and reduce the cost of transactions. Sectoral adoption for international settlements seems feasible in the long run.

If the Fed rates fall, the allure of stablecoins would be magnified. They would become a preferred gateway to crypto for many institutions in search of yields.

Fidelity’s study underlines the close link between monetary policy and crypto adoption. If the Fed reduces the cost of money in 2024, DeFi and stablecoins could experience a massive influx of institutional investors. This hypothesis remains conditional on progress in terms of infrastructure and crypto regulation. But it illustrates the potential for crypto innovations to gain credibility among “TradFi” actors.