Stablecoins Face Major Challenges; Some to Diversify Sources

Stablecoins Face Major Challenges; Some to Diversify Sources

With the USD interest rates reaching zero percent and the U.S. Treasury yields turning negative, stablecoins which depend on such rates and yields face major challenges, according to Cryptonews website.

Although some analysts consider that reliance on interest rates will not be possible in the current environment, they do not expect major stablecoins to collapse. Most of such stablecoins will overcome such challenges during the crisis, while others will diversify their sources of income.

Brant Downes, a research analyst with Smith + Crown said:

“Many stablecoins fund operational expenses through interest on funds held to back their issued coins, but a 0% or negative interest rate environment would definitely create problems for this model.”

The analyst refers to stablecoins such as Tether (USDT), USD Coin (USDC) and TrueUSD (TUSD) as their USD deposits will normally bring a steady source of revenue to their issuers. However, such revenue would dry up.

Downes went up to say:

“There are several factors that influence how this will unfold.”

“One is the extent to which interest rates descend to 0%, or below, and the length of time at which they might remain there. Another is the range of revenue sources stablecoin issuers maintain. Those merely operating a fiat-backed stablecoin will be impacted earlier and more severely,” he added.

For his part, Glen Goodman, a crypto analyst, said some fiat-backed stablecoins may have hard time to survive under the current conditions.

“But there are other ways for stablecoin issuers to prosper,” Goodman said. “For example by carrying out market-making activities and charging fees for issuing and redeeming their coins.”

Some stablecoins to diversify sources

Some analysts expect USD-backed stablecoins to diversify their revenue sources.

Omri Ross, chief blockchain scientist at eToro, said:

“The models we might refer to as the ‘first generation’ of stablecoins have traditionally relied exclusively on seigniorage for revenues, which, needless to say, is a difficult situation in a prolonged negative interest rate environment.”

“We might see some stablecoin issuers introduce mechanisms where holders have to pay fees, resembling negative rates,” he said.

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Rabea Maguid 551 Articles
Rabea Maguid is a journalist completely obsessed with crypto industry. He holds B.A. from Al-Azhar University, and has a background in journalism and economics. Rabea Maguid likes to think about the future in a positive way, and sees blockchain as a potential driver of deep societal change.