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- 1 Asset manager Fidelity says lower rates may revive institutional DeFi interest.
- 2 It predicts TradFi firms could explore stablecoins more amid clearer regulations.
- 3 However, smart contracts and infrastructure are still needed to reduce platform risks.
Decentralized finance (DeFi) platforms and stablecoin adoption could accelerate drastically if the Federal Reserve embraces looser monetary policy, according to predictions by asset management giant Fidelity Investments.
In its 2024 digital assets outlook report, Fidelity suggests Fed interest rate cuts may incentivize institutions to revisit DeFi yields. At the same time, it expects more defined stablecoin rules to encourage traditional finance (TradFi) firms to experiment with dollar-pegged cryptocurrencies.
All Eyes on Fed Shift
Fidelity notes that anticipation initially ran high in 2023 that institutions would flock to DeFi protocols for their mid-single-digit returns. However, the allure of decentralized lending faded as the Fed’s aggressive rate hikes pushed safer fixed-income assets to similar or higher yields.
With Treasuries and corporate bonds suddenly more competitive, institutions spurned the risks of putting funds into unproven DeFi contracts. Given concerns around smart contract vulnerabilities, only the most risk-tolerant dipped their toes.
Yet, the tide could turn should policymakers successfully engineer the desired economic “soft landing.” If growth stabilizes, leading the Fed to cut rates and sending bond yields downward, DeFi opportunities may become once again hard to ignore at a juncture of lower comparative opportunities.
It could present the perfect opening for yield-starved institutions to allocate toward decentralized protocols and tap into the space.
Stablecoin Evolution
Beyond DeFi, Fidelity also spots potential for greater stablecoin adoption on the institutional front in 2024. It singles out settlement optimizations and global payment flows as likely use cases.
Continued maturation around stablecoin regulations should assuage lingering concerns among TradFi companies over compliance uncertainties. With clearer guardrails, banks may finally pursue settlement infrastructure integrations leveraging stablecoin speed and cost efficiencies.
Fidelity predicts real-time gross settlement networks between financial institutions to integrate tokenized dollar-pegged cryptocurrencies. This allows near-instant transfer and final settlement of high-value payments domestically or internationally.
Additionally, global corporates may increasingly view stablecoins as compelling solutions for enhancing international payment transactions and overseas vendor relationships. Still extremely low-cost and efficient versus traditional correspondent banking wires, their advantages appear primed for multinational firms.
Supply chain payments also stand to benefit from stablecoin adoption. Large manufacturers and raw material providers stand to gain from instantly paying suppliers abroad or receiving payments using digitized dollars rather than checks or credit.
Regional subsidiaries of global corporations can gain treasury operations improvements from shared tokenized dollar pools, allowing flexible funding allocation. Rather than siloed working capital, tokenized cash logs enable dynamic cross-border redistribution as operational needs dictate.
As these diverse business use cases disseminate in 2024, Fidelity expects stablecoins to transition from speculative trading instruments toward critical enterprise financial plumbing.
Path Ahead Not Guaranteed
Nevertheless, realizing this DeFi and stablecoin institutional influx relies on key assumptions.
The Fed must change policy from its current hardline stance against persistent inflation. DeFi platforms must also continue enhancing security and ease of use while handling scaling demands. Moreover, stablecoins not only require clearer guidelines but also court rulings settling lingering jurisdiction questions.
Yet should the stars align, Fidelity concludes 2024 may go down as a definitive year institutional participation in digital assets graduates from exploration to material adoption. Rather than isolated experiments, real commitment commences.
For an industry longing for traditional player buy-in after past false starts, the awaiting promise still outweighs any uncertainty over whether this next inflection point will finally transpire in 2024.
Andrew is a blockchain developer who developed his interest in cryptocurrencies while pursuing his post-graduation major in blockchain development. He is a keen observer of details and shares his passion for writing, along with coding. His backend knowledge about blockchain helps him give a unique perspective to his writing skills, and a reliable craft at explaining the concepts such as blockchain programming, languages and token minting. He also frequently shares technical details and performance indicators of ICOs and IDOs.
