Fed Decision Preview: How U.S. Interest Rates Impact the Stablecoin Industry?
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Fed Decision Preview: How U.S. Interest Rates Impact the Stablecoin Industry?
Risks and multiple hidden dangers.
Navigating Web3 tides with focused insightsAuthor: 0xYYcn Yiran (Bitfox Research)
The stablecoin market continues to grow rapidly in size and significance, driven by the rising热度 of cryptocurrency markets and expanding mainstream use cases. By mid-2025, its total market capitalization had surpassed $250 billion, representing over 22% growth since the beginning of the year. According to a Morgan Stanley report, these dollar-pegged tokens now see more than $100 billion in daily trading volume and powered $27.6 trillion in on-chain transaction volume in 2024 alone. Nasdaq data indicates this transaction volume has already exceeded the combined totals of Visa and Mastercard. However, beneath this booming landscape lie a series of hidden risks, most critically the tight linkage between issuers' business models, the stability of their tokens, and fluctuations in U.S. interest rates. As the Federal Open Market Committee (FOMC) approaches its next decision, this research focuses on fiat-collateralized dollar stablecoins (such as USDT and USDC), adopting a global perspective to examine how the Federal Reserve's interest rate cycle and other potential risks may reshape the industry.
Stablecoin 101: Growth Amid Hype and Regulation
Definition of Stablecoins:
A stablecoin is a type of crypto asset designed to maintain a constant value, with each token typically pegged 1:1 to the U.S. dollar. This price stability is primarily achieved through two mechanisms: full backing by reserve assets (such as cash and short-term securities), or reliance on specific algorithms to control token supply. Fiat-collateralized stablecoins, represented by Tether (USDT) and Circle (USDC), are fully backed by holdings of cash and short-term securities for every unit issued. This backing mechanism is central to their price stability. According to the Atlantic Council, approximately 99% of current stablecoin circulation is dominated by dollar-denominated types.
Industry Significance and Current State:
In 2025, stablecoins are breaking out of the confines of the crypto space and accelerating integration into mainstream finance and commerce. Payment giant Visa has launched a platform enabling banks to issue stablecoins; Stripe has integrated stablecoin payment functionality; and Amazon and Walmart are exploring launching their own stablecoins. At the same time, global regulatory frameworks are taking shape. In June 2025, the U.S. Senate passed the landmark "Generative Innovation and Stability in United States Payments Act" (GENIUS Act), establishing the first federal-level stablecoin regulation. Key requirements include: issuers must maintain a stable 1:1 backing ratio using high-quality liquid assets (cash or short-term Treasury bills maturing within three months), and clearly define obligations to protect holder rights. Across the Atlantic, Europe’s Markets in Crypto-Assets Regulation (MiCA) implements even stricter rules, empowering authorities to restrict non-euro stablecoins if they threaten eurozone monetary stability. On the market front, stablecoins show strong momentum: as of June 2025, their total circulating value exceeded $255 billion. Citigroup forecasts the market could surge to $1.6 trillion by 2030—a roughly sevenfold increase—indicating that stablecoins are moving toward mainstream adoption, but rapid growth also brings new risks and friction.
Figure 1: Ethereum Stablecoin Adoption Comparison and Market Activity Analysis (Past 30 Days)
Fiat-Supported Stablecoins and Interest Rate Sensitivity Model
Unlike traditional bank deposits that pay interest to customers, stablecoin holders typically receive no yield. Under the GENIUS Act, account balances for fiat-collateralized dollar stablecoins are explicitly defined as non-interest-bearing (0%). This regulatory setup allows issuers to retain all investment income generated from reserve funds. In the current high-interest-rate environment, this mechanism has turned companies like Tether and Circle (issuer of USD Coin) into highly profitable entities. However, it also makes them extremely vulnerable during periods of declining interest rates.
Reserve Investment Structure:
To ensure liquidity and maintain the stablecoin’s peg, major issuers allocate the bulk of their reserves into short-term U.S. Treasury bills and other short-duration financial instruments. As of early 2025, Tether held between $113 billion and $120 billion in U.S. government debt—approximately 80% of its total reserves—ranking it among the top 20 largest holders of U.S. Treasuries globally. The chart below details Tether’s reserve composition, clearly showing a heavy concentration in Treasuries and cash-like assets, with minimal allocations to alternative assets such as gold and Bitcoin.
Figure 2. Tether's Reserve Composition in 2025 (Dominantly U.S. Treasury Bills), Reflecting High Dependence of Fiat-Supported Stablecoins on Interest-Bearing Government Assets
High-quality reserve assets not only support the peg and bolster user confidence but also generate substantial interest income—the lifeline of today’s stablecoin business model. During 2022–2023, the Federal Reserve’s aggressive rate hikes pushed yields on Treasury bills and bank deposits to multi-year highs, significantly boosting returns on stablecoin reserves. For example, according to Circle’s disclosed financials, $1.67 billion out of its $1.68 billion total revenue in 2024 (99%) came from interest earned on reserve assets. Meanwhile, Techxplore reported that Tether’s profits reached $13 billion in 2024, rivaling or surpassing earnings of Wall Street titans like Goldman Sachs. This level of profitability—achieved with an operational team of around 100 people at Tether—highlights the powerful boost high interest rates provide to stablecoin issuers. Essentially, stablecoin issuers operate a high-return “carry trade,” deploying user funds into Treasury assets yielding over 5%, while capturing the entire spread due to users accepting zero interest. This creates significant vulnerability to interest rate volatility.
Interest Rate Risk Exposure
Stablecoin issuers’ revenue models are highly sensitive to changes in Federal Reserve interest rates. For instance, a mere 50-basis-point rate cut (0.50%) could slash Tether’s annual interest income by approximately $600 million. As Nasdaq analysts have warned: “Overreliance on interest income will leave issuers like Circle vulnerable in a rate-cutting cycle.”
The following Figure 3 shows the federal funds rate curve projected by CME based on market expectations as of July 23, 2025 (forecast period through end of 2026); Figure 4 quantitatively illustrates, in million-dollar terms, how interest rate changes impact Circle’s reserve earnings.
Figure 3. Federal Funds Rate Outlook for December 2026 (CME, 2025/07/23)
Figure 4. Circle’s Reserve Income Sensitivity to Interest Rate Changes
In 2024, Circle’s interest income from reserve assets amounted to $1.67 billion, accounting for 99% of its total revenue ($1.68 billion). Based on the CME data model (as of July 23, 2025), if the federal funds rate falls to the 2.25%–2.50% range by December 2026 (with about 90% probability), Circle is expected to lose approximately $882 million in interest income—over half of its 2024 interest-related earnings. To compensate for this revenue shortfall, the company would need to double the circulating supply of its USDC stablecoin by the end of 2026.
Other Core Risks Beyond Interest Rates: Multiple Challenges Facing the Stablecoin Ecosystem
While interest rate dynamics are central to the stablecoin industry, the system faces several other critical risks and challenges. Amid widespread industry optimism, there is an urgent need to systematically identify these risk factors to provide a clear and comprehensive analysis:
Regulatory and Legal Uncertainty
Stablecoin operations are currently subject to fragmented regulatory regimes such as the U.S. GENIUS Act and the EU’s MiCA. While these frameworks grant some legitimacy to issuers, they also impose high compliance costs and the risk of sudden market access restrictions. Regulators can swiftly suspend redemption functions or ban specific stablecoins from key markets in response to actions such as insufficient reserve transparency, sanctions evasion (e.g., Tether’s involvement in billions of dollars of transactions in sanctioned regions), or consumer rights violations.
Bank Partnerships and Liquidity Concentration Risk
Fiat-collateralized stablecoins rely heavily on a limited number of partner banks for reserve custody and fiat on/off-ramps. A sudden crisis at a partner bank (such as the collapse of Silicon Valley Bank, which froze $3.3 billion worth of USDC reserves) or a large-scale redemption wave can rapidly deplete bank deposit reserves, leading to de-pegging. If wholesale redemption pressure overwhelms a bank’s cash buffers, it could threaten broader banking system liquidity.
Peg Stability and De-Pegging Risk
Even when fully collateralized, stablecoins can—and have—experienced peg failures during periods of eroding market confidence. For example, in March 2023, concerns over reserve accessibility caused USDC’s price to plunge to $0.88. Algorithmic stablecoins face even steeper stability curves, with TerraUSD’s (UST) 2022 collapse serving as a stark example.
Transparency and Counterparty Risk
Users depend on attestations (typically issued quarterly by issuers) to assess the authenticity and liquidity of reserves. However, the lack of comprehensive public audits raises credibility concerns. Whether held in banks, money market funds, or repo agreements, reserve assets carry counterparty and credit risk, which under stress conditions could materially impair redemption guarantees.
Operational and Technical Security Risks
Centralized stablecoins can freeze or confiscate tokens in response to attacks, introducing single points of governance risk. DeFi versions are vulnerable to smart contract exploits, cross-chain bridge hacks, and custodian breaches. Additionally, user errors, phishing attacks, and the irreversible nature of blockchain transactions pose ongoing security challenges for holders.
Macro-Financial Stability Concerns
With hundreds of billions of dollars in stablecoin reserves concentrated in the short-term U.S. Treasury market, large-scale redemptions could directly affect Treasury demand structure and yield volatility. Extreme outflows might trigger fire sales in the bond market. Moreover, the widespread dollarization effect of stablecoins could weaken the transmission of Federal Reserve monetary policy, potentially accelerating development of a U.S. central bank digital currency (CBDC) or prompting stricter regulatory safeguards.
Conclusion
As the FOMC prepares for its next meeting, while markets widely expect rates to remain unchanged, upcoming meeting minutes and forward guidance will become focal points. The remarkable growth of fiat-collateralized stablecoins like USDT and USDC masks their deeply entrenched business model dependency on U.S. interest rate movements. Looking ahead, even modest rate cuts (e.g., 25–50 basis points) could erode hundreds of millions in interest income, forcing issuers to reassess growth strategies or consider sharing part of the yield with holders to sustain adoption.
Beyond interest rate sensitivity, stablecoins must navigate an evolving regulatory landscape, bank and liquidity concentration risks, challenges to peg integrity, and operational vulnerabilities ranging from smart contract flaws to inadequate reserve transparency. Crucially, as these tokens become systemically important holders of short-term U.S. Treasuries, their redemption behavior could disrupt global bond pricing mechanisms and interfere with the effectiveness of monetary policy transmission.
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