The Federal Reserve is expected to lower its interest rate this year, which could have a positive impact on the adoption and innovation of decentralized finance (DeFi) and stablecoins, according to a report by Fidelity.
DeFi is a term that refers to a range of financial applications and protocols that operate on blockchain networks, such as lending, borrowing, trading, and investing. DeFi platforms often offer higher returns than traditional finance (TradFi) products, as they eliminate intermediaries and leverage smart contracts.
However, in 2023, DeFi did not see much institutional interest, as the Fed raised its interest rate to combat inflation and stimulate economic growth. This made TradFi products more appealing and safer for institutions, who were also wary of the risks and challenges associated with DeFi, such as user interface, security, and regulation.
Fidelity, a leading asset manager and digital asset service provider, said in its 2024 Digital Assets Look Ahead report that this could change in 2024, as the Fed is likely to cut its interest rate in response to the slowing economy and the Omicron variant. This could make DeFi yields more attractive and competitive than TradFi yields, and encourage institutions to explore and adopt DeFi products, especially if the infrastructure and regulation improve.
Stablecoins may see more use cases and legitimacy
Stablecoins are digital tokens that are pegged to a fiat currency, such as the US dollar, or a basket of assets, such as gold or other cryptocurrencies. Stablecoins aim to provide stability, liquidity, and efficiency for digital asset transactions, as they avoid the volatility and friction of traditional payment methods.
Fidelity predicted that stablecoins would be the greatest potential catalyst for digital asset adoption in 2024, as more institutions and sectors would explore and use them for various purposes, such as settlements, payments, remittances, and international trade. Fidelity said that stablecoins could offer faster and cheaper solutions than existing systems, and that TradFi firms using stablecoins could bring legitimacy and trust to the sector.
Fidelity also expected that the regulatory environment for stablecoins would become clearer and more certain in 2024, as authorities and policymakers would address the issues and risks posed by stablecoins, such as consumer protection, financial stability, and monetary policy. Fidelity said that this would provide more confidence and clarity for stablecoin issuers and users, and that the dominant stablecoins, such as Tether (USDT) and USD Coin (USDC), would not lose their market share.
Fidelity is bullish on digital assets
Fidelity is one of the most prominent and influential institutions in the digital asset space, as it offers various services and products for institutional and retail investors, such as custody, trading, research, and analytics. Fidelity also holds and invests in digital assets, such as Bitcoin and Ethereum, and supports the development and innovation of the industry.
Fidelity said that it was optimistic about the future of digital assets, and that it expected more growth, adoption, and diversification in 2024. Fidelity said that it would continue to provide and enhance its digital asset solutions, and that it would collaborate with other stakeholders, such as regulators, industry associations, and academic institutions, to advance the digital asset ecosystem.
