Stablecoins, the Beating Heart of Crypto Markets

Stablecoins, the Beating Heart of Crypto Markets

by Adam Morgan McCarthy AND thOMAS PROBST

In crypto stablecoins are more than just trading vehicles, they’re at the heart of the market. They’re also highly profitable for their issuers, and this raises concerns for some, and brings into question the “stable” nature of the assets.

Due to high interest rates in the U.S., and the fact that most issuers hold short-term Treasuries as backing for their stablecoins, issuers outperform most bulge-bracket banks. Tether expects to earn around $15bn this year, mostly due to interest earned from holdings used to back its USDT stablecoin.

However, there are several problems with this model. Namely, rates are falling, and while there’s new question marks over a December rate cut, it’s inevitable that at some point in the future rates will come down. They’ve already fallen from their peak in 2023/2024, and we’ll likely see that gap widen in the coming months, regardless of individual governor’s comments.

Secondly, the practice of earning a yield on a pegged asset raises difficult regulatory questions. Put it simply, if it’s intermittently generating a yield, it’s not stable in value, it’s a fixed income product.

The fixed income comparisons become even harder to deny when you look at the rise of on-chain money market funds. We explore this in more detail in the full report.