Crypto: $625M lost for Tether and stablecoins!

As the Federal Reserve (Fed) begins to change course on interest rates, Tether and four other issuers of stable cryptocurrencies risk losing $625 million in annual interest income. This upheaval, revealed by a recent report from CCData, highlights the dependence of stablecoins on US Treasuries, an essential pillar of their economic model.

The Fed changes course: an earthquake for stablecoins

Since the rise of stablecoins, these cryptocurrencies backed by real assets have positioned themselves as pillars of stability in the ecosystem.

But their success is largely based on the strategy of investing in US Treasury bonds, assets known for their security and yield. However, the recent decision by the Fed to lower its interest rates has redistributed the cards.

This is because when interest rates fall, Treasury yields also fall. For issuers like Tether, almost 80% of whose reserves are made up of Treasury bonds, this means an immediate reduction in the income generated by these investments.

According to CCData, this drop could cost the stablecoin industry around $625 million, a dizzying figure that reflects the extent of their dependence on US monetary policy.

The figures speak for themselves: Tether, the undisputed leader of stablecoins with $93.2 billion in assets under management, is particularly exposed.

Its record first-half 2024 profits of $5.2 billion are largely based on yields on its U.S. government bonds. Now these revenues are under serious threat.

Diversification: the future of stablecoins?

Faced with this threat, the question arises: can stablecoins continue to thrive relying solely on Treasury bills? Some indications suggest that issuers of stablecoins like Tether have already initiated diversification strategies to compensate for this vulnerability.

Tether recently invested more than $112 million in an agribusiness company in Argentina, a move that, while surprising for a crypto company, illustrates a desire to diversify its revenue.

This investment in agribusiness reflects a growing trend among stablecoin issuers to explore sectors outside of finance to secure new sources of revenue. The question remains: will this diversification be enough to compensate for the loss of Treasury yields?

At the same time, other cryptos, such as Circle's USDC, are in a similar position. With $28.7 billion in Treasuries, USDC is in a comparable situation to Tether. However, Circle is banking on more dynamic fund management, particularly via its Circle Reserve Fund, to mitigate the impact of falling rates.

Towards a changing economic model?

The Fed's decision deserves special attention. This change could well mark a turning point in the stablecoin economy.

Interest income from Treasury bills has long been a major source of profits for these companies, allowing them to operate while ensuring the stability of their tokens. If these revenues decline, it could force issuers to rethink their business model.

One option for stablecoin issuers would be to increase their service fees or explore new investment avenues.

However, this poses challenges: how to maintain user confidence while adapting their model to a lower interest rate environment? If Tether, Circle, and other stablecoins fail to find viable alternatives, they risk losing competitiveness against other players in decentralized finance, less dependent on traditional assets.

The pressure is mounting, and eyes are now on the future strategies of stablecoin issuers. Will they weather this storm or will they have to give ground to more agile alternatives? The stablecoin sector faces a major challenge with this decision by the Fed. Although $625 million in losses may seem bearable in the short term for giants like Tether, the question of their long-term resilience remains open. The economic model that made them successful now seems to be in the hot seat. Meanwhile, bitcoin and altcoins are falling sharply.