Asset management giant Fidelity, in its latest report, suggested that the anticipated Federal Reserve rate cut could increase large institutions’ interest in decentralized finance (DeFi) and stablecoins as the infrastructure develops.
Institutions to Show More Interest in DeFi by 2024
Fidelity, in its report titled “2024 Outlook for Digital Assets” published on January 13, stated that while institutions were expected to turn to DeFi last year for returns, Federal Reserve rate hikes pushed them towards “perceived safer” traditional fixed-income products, preventing this shift. The report highlighted that DeFi platforms are seen as having difficult interfaces and being prone to attacks and hacks, which has kept institutions relatively distant from this space:
In the current risk-off environment, institutions thought the mid-single-digit returns offered by DeFi yield were too low for the associated risk of experimenting with smart contracts.
However, Fidelity expects institutional interest to increase again in 2024 if DeFi returns become more attractive than traditional finance (TradFi) returns and a more developed infrastructure emerges.
Fidelity also added that following the updated rules by the Financial Accounting Standards Board (FASB), which allow companies to report both their losses and gains from cryptocurrencies on paper, institutions are expected to be more open to adding digital assets to their balance sheets.
Institutions to Turn to Stablecoins
In the section of the report regarding stablecoins, Fidelity predicted that the corporate exploration of assets pegged to the US dollar could be the biggest potential catalyst for adoption this year.
TradFi companies exploring the use of stablecoins for purposes such as trading could lend them legitimacy, and with users seeking faster and cheaper payment methods, the use of stablecoins is expected to increase. The three main sectors anticipating this growth are payments, money transfers, and international trade. Fidelity added that regulatory frameworks are likely to become clearer, expecting Tether (USDT) and USD Coin (USDC) to continue to gain strength in 2024.
The asset management giant noted that the stablecoin market is expected to continue to attract interest throughout 2024, and the interest could exceed expectations with the onset of Federal Reserve rate cuts.