A Return Of Institutional Investors
Prominent asset management firm Fidelity Investment predicts a return of institutional interest in decentralized finance (DeFi) and stablecoins, assuming the US Federal Reserve (Fed) cuts interest rates as projected. According to the report titled “2024 Digital Assets Look Ahead,” recently released by Fidelity, this recovery depends on the ongoing development of financial infrastructure throughout the year.
The investment manager stated that despite earlier projections that institutions will invest in DeFi in 2023 because of the high yields it provides, its prediction has yet to occur. The report attributes the difference in expectations to the Fed’s interest rate hikes, which prompted institutional investors to reinvest their capital in traditional fixed-income instruments, considered a more secure investment.
However, Fidelity believes that if the United States central bank decides to lower interest rates, it will spark renewed institutional interest in the decentralized finance industry and stablecoins.
Challenges In DeFi
Most investment analysts have criticized decentralized finance platforms for the complexity of their user interfaces and their susceptibility to cyber threats. Hence, institutional investors could exercise caution and thoroughly evaluate the risks associated with investing in them.
Furthermore, enterprises have been discouraged from exploring the potential of DeFi due to the dominant risk-averse sentiment in this financial landscape. These institutions could argue that the returns provided by DeFi yields, which are in the mid-single-digit range, are insufficient to compensate for the risks associated with experimenting with smart contracts.
However, there is a possibility that a significant shift may occur in 2024 since Fidelity believes that institutions may have a “renewed interest” in DeFi yields. Meanwhile, the success of this revival is dependent on whether DeFi yields will once again outperform those of traditional finance (TradFi) and whether the decentralized financial ecosystem will become more secure.
Fidelity’s forward-thinking approach also applies to companies, with the asset manager expecting a potential shift in corporate attitudes regarding digital assets. According to the firm’s recent report, the United States Financial Accounting Standards Board’s updated rulebooks now allow firms to report both paper losses and gains from their crypto holdings. Therefore, these updated guidelines could help corporations become “more comfortable with putting digital assets on their balance sheet.”
Institutional Move Toward Stablecoins
Furthermore, Fidelity’s anticipation extends to stablecoins, with institutional research of US dollar-pegged assets serving as the primary driver for adoption. The report added that TradFi organizations that employ stablecoins for operations such as settlements could rise significantly in the next few months.
Fidelity believes that institutional involvement will increase the legitimacy of stablecoins, particularly in sectors including payments, remittances, and international trade. Users seeking faster and less expensive payment methods are expected to drive growing usage in these areas.
In addition, Fidelity emphasizes the possibility of more explicit regulatory frameworks, resulting in a more predictable market for stablecoins. Based on this context, it predicts that top stablecoins like Tether (USDT) and USD Coin (USDC) will maintain their positions, and their usage for these purposes will expand to several regions.
The analysis also anticipates additional traction, particularly if the Fed decides to ratify the proposed decrease in interest rate. Like the US, many other jurisdictions would likely establish stablecoin regulations as the usage of this cryptocurrency expands into many regions.
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