If the Federal Reserve lowers the returns on regular financial products this year, institutions might find DeFi (Decentralized Finance) products attractive. This means they could be tempted to explore and invest in DeFi as an alternative.
Fidelity, an asset manager, suggests that if the Federal Reserve in the United States lowers interest rates as expected, big institutions might become more interested in decentralized finance (DeFi) and stablecoins. However, Fidelity notes that this depends on the improvement of the infrastructure supporting these technologies throughout the year.
Fidelity’s 2024 Outlook on Digital Assets and DeFi Adoption
In its recently released “2024 Digital Assets Look Ahead” report on January 13, Fidelity shared insights about the potential for institutional engagement in decentralized finance (DeFi). Contrary to expectations last year, institutions didn’t explore DeFi for yields due to Federal Reserve rate hikes. Instead, they opted for traditional fixed-income products perceived as safer.
DeFi platforms faced challenges with user interfaces and concerns about vulnerabilities to hacks and exploits, making institutions cautious about the associated risks with smart contracts. In the risk-averse environment, institutions considered the mid-single digit returns from DeFi yields too low for the experimentation with smart contracts.
However, Fidelity anticipates a possible shift in 2024. If DeFi yields become more attractive than traditional financial (TradFi) yields and the infrastructure supporting DeFi further develops, institutions may show renewed interest.
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 predicts that corporations might become more comfortable incorporating digital assets into their balance sheets, especially with updated rules from the United States Financial Accounting Standards Board (FASB) allowing companies to report both paper losses and gains from their crypto holdings.
Fidelity’s Insights on Stablecoins and 2024 Adoption Prospects
In a dedicated section on stablecoins, Fidelity foresees institutional exploration as the primary catalyst for the adoption of dollar-pegged assets this year. Fidelity suggests that if traditional financial (TradFi) firms start using stablecoins for activities like settlements, it could lend credibility to these assets.
The company anticipates that the three main sectors to witness increased stablecoin adoption will be payments, remittances, and international trade, driven by users seeking faster and more cost-effective payment methods.
Fidelity also expresses optimism about regulatory frameworks becoming clearer, offering more certainty to the stablecoin market. The report predicts that stablecoins like Tether (USDT) and USD Coin (USDC) maintaining their $1.00 peg won’t face challenges in 2024.
Fidelity concludes that this market segment is expected to gain more traction throughout the year, potentially even more so if the anticipated Federal Reserve interest rate cuts materialize.
Important: Please note that this article is only meant to provide information and should not be taken as legal, tax, investment, financial, or any other type of advice.
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