If the Federal Reserve reduces yields on traditional financial products this year, institutions might find DeFi products enticing, according to asset manager Fidelity.
Fidelity’s 2024 Digital Assets Look Ahead report, released on January 13, suggests that a potential interest rate cut by the Federal Reserve in the United States could reignite major institutions’ curiosity in decentralized finance (DeFi) and stablecoins, provided that the infrastructure advances further in the coming year.
While Fidelity initially expected institutions to explore DeFi for yields in the previous year, this did not materialize due to Federal Reserve rate hikes. These rate hikes led institutions to opt for what was perceived as safer — traditional fixed-income products.
DeFi platforms have faced challenges in the past, including complex interfaces and concerns about vulnerabilities to hacks and exploits. These factors prompted institutions to carefully assess 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,” Fidelity noted.
However, Fidelity anticipates a potential renewed interest from institutions in DeFi yields in 2024 if they become more attractive than yields in traditional finance (TradFi), coupled with the emergence of more developed infrastructure.
Today’s #Bitcoin ETF approvals, along with the rapid growth of Real World Assets (RWAs) in DeFi, and the increasing demand for scalable infrastructure for decentralized applications mark an intriguing trend in this cycle.
It's evident that institutions are not just warming up to… https://t.co/17HpIW97wF
— SaucerSwap Labs 🧪 (@SaucerSwapLabs) January 11, 2024
Fidelity also foresees corporations becoming more comfortable with the idea of incorporating digital assets into their balance sheets, especially following updated rules from the United States Financial Accounting Standards Board (FASB) allowing companies to report both paper losses and gains from their crypto holdings.
In terms of stablecoins, Fidelity predicts that institutional exploration of dollar-pegged assets could be a significant catalyst for adoption this year. Traditional finance firms considering the use of stablecoins for settlements could bring legitimacy to these assets. Fidelity expects increased adoption in payments, remittances, and international trade, citing faster and cheaper payment methods as key drivers.
Fidelity also anticipates that regulatory frameworks will become clearer, providing more certainty, and predicts that leading stablecoins like Tether and USD Coin will maintain their positions in the market throughout 2024, potentially gaining more traction if Federal Reserve interest rate cuts occur as anticipated.
