Fidelity, an asset manager, predicts that a forthcoming interest rate reduction by the Federal Reserve of the United States could reignite the interest of major institutions in decentralized finance (DeFi) and stablecoins, assuming the infrastructure continues to advance through 2024.
In its 2024 Digital Assets Look Ahead report, published on January 13, Fidelity stated that although it had anticipated that institutions would invest heavily in DeFi in 2023 for its yields, this continued.
Instead, they shifted their focus to conventional fixed-income products, which are considered “safer,” due to the increase in interest rates by the Federal Reserve.
In the past, DeFi platforms were considered to have complex user interfaces and were vulnerable to hacking and exploitation. As a result, institutions have begun to “examine the risks associated with smart contracts.”
“In the prevailing 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.”
However, institutions may “rekindle interest” in DeFi yields in 2024 if “they once again surpass TradFi yields in attractiveness” and “more developed infrastructure emerges.”
Additionally, Fidelity anticipates that corporations may become “more comfortable with the idea of putting digital assets on their balance sheets” after the United States Financial Accounting Standards Board’s updated regulations permitting firms to report both paper losses and gains from their crypto holdings.
Institutional Investors to Explore Stablecoins
According to a section on stablecoins on Fidelity, “the greatest potential catalyst” for adoption in 2024 would be an institutional investigation of U.S. dollar-pegged assets.
TradFi firms investigating the use of stablecoins for settlements, for example, could “legitimize” them, according to the report, which also identifies “payments, remittances, and international trade” as the three primary sectors where stablecoin adoption will increase as users seek faster and cheaper payment methods.
It further anticipated that regulatory frameworks would “likely become clearer, providing greater certainty” and that neither Tether USDT nor USD Coin would lose footing in 2024.
“Fidelity predicts that this market segment will maintain its momentum through 2024, and possibly even more so if anticipated interest rate reductions by the Federal Reserve transpire.”
