- If the Fed cuts interest rates in 2024, DeFi yields and stablecoins may become more attractive to institutions compared to traditional finance.
- Institutions did not adopt DeFi in 2023 due to Fed rate hikes and concerns about unproven technology, but rate cuts could renew interest.
- Stablecoins may see increased adoption in 2024 as corporations become more comfortable holding crypto, and as institutions use them for faster settlements.
The Federal Reserve is predicted to cut interest rates in 2024, which could renew institutional interest in decentralized finance (DeFi) and stablecoins. This is according to a new report from asset manager Fidelity.
Why Institutions Didn’t Flock to DeFi in 2023
In 2023, Fidelity predicted that institutions would dive into DeFi for its yields. However, this did not end up happening. Instead, Fed rate hikes pushed institutions to move into traditional fixed-income products, which are perceived to be safer.
DeFi platforms were previously regarded as having hard-to-use interfaces and being susceptible to hacks and exploits. In the risk-off environment, institutions deemed the mid-single digit returns offered by DeFi yield to be too low for the associated risk of experimenting with smart contracts.
How Rate Cuts Could Boost DeFi and Stablecoin Adoption
If the Fed cuts rates as predicted in 2024, DeFi yields may once again become more attractive than traditional finance (TradFi) yields. If more developed DeFi infrastructure also emerges, institutions may have renewed interest.
Fidelity also expects that corporations may become more comfortable with holding digital assets on their balance sheets. Updated accounting rules now allow companies to report crypto gains and losses.
Why Institutions Will Explore Stablecoins
Fidelity predicts that institutional exploration of US dollar-pegged stablecoins will be a major potential catalyst for adoption in 2024.
TradFi firms exploring stablecoins for purposes like settlements could bring legitimacy. Fidelity expects increased stablecoin use in payments, remittances, and international trade as users seek faster and cheaper options.
Regulatory clarity may also provide more certainty around stablecoins. Fidelity believes Tether and USD Coin will maintain dominance. The report states, “It is expected that this area of the market continues to gain traction throughout 2024. Potentially more so if anticipated Federal Reserve interest rate cuts occur.”
