Fidelity Digital suggests that 2024 might witness a resurgence of institutional interest in DeFi yields.
In its recently released 2024 Digital Assets Look Ahead report, asset manager Fidelity Investments predicts a potential resurgence of institutional interest in Decentralized Finance (DeFi) and stablecoins, based on the Federal Reserve‘s anticipated interest rate cuts.
Stablecoins and Institutional Adoption
Fidelity Digital, the crypto arm of the firm identifies stablecoins, pegged to the US dollar, as a catalyst for adoption in 2024.
The report suggests that traditional finance firms exploring stablecoins for settlements could bring legitimacy to these digital assets. Payment, remittances, and international trade are expected to be the primary sectors to witness increased stablecoin adoption as users seek faster and cheaper payment methods.
The report also predicts that regulatory frameworks for stablecoins will become clearer in 2024, providing more certainty to market participants. Fidelity believes that Tether (USDT) and USD Coin (USDC) will maintain their positions, and stablecoins, in general, will continue gaining traction throughout the year, potentially more so if anticipated Federal Reserve interest rate cuts materialize.
Fidelity’s report highlights that despite expectations for institutions to explore DeFi for its attractive yields in 2023, this did not materialize. The Federal Reserve’s rate hikes led institutions to opt for traditional fixed-income products perceived as safer in a risk-off environment.
DeFi platforms have faced challenges, including user-unfriendly interfaces and vulnerabilities to hacks and exploits. Institutions have been cautious, scrutinizing the risks associated with smart contracts, particularly when the returns offered by DeFi yield were perceived as too low for the associated risks.
However, Fidelity Digital suggests that 2024 might witness a resurgence of institutional interest in DeFi yields. This resurgence would be contingent on DeFi yields becoming more attractive than traditional finance yields, coupled with the development of a more robust infrastructure.
Fidelity also anticipates corporations becoming more comfortable adding digital assets to their balance sheets. This shift follows updated rules from the United States Financial Accounting Standards Board, allowing companies to report both paper losses and gains from their crypto holdings.
Circle’s Research on Stablecoins
Fidelity’s report aligns with an earlier research co-authored by Circle Internet Financial in November, focusing on payment stablecoins for real-time gross settlements. The study led by Circle Chief Economist Gordon Y Liao highlights the increasing real-world use of fiat-backed stablecoins, especially for their reduced speculative and leveraged activities compared to other forms of money.
Stablecoins have evolved beyond their initial role of building trust in the digital asset market. The report emphasizes the potential of stablecoins in real-time gross settlements, citing the ability to mitigate risks associated with concentrated liquidity in the traditional monetary system. The efficiency of cross-border payments is also emphasized, as stablecoins backed by fiat can move swiftly with minimal friction.
While acknowledging the advantages of stablecoins, the paper emphasizes the need for better integration with existing financial infrastructure to drive future growth in real-time payments. This integration is regarded as a critical step toward making stablecoins an integral component of the larger financial ecosystem.