Coinbase: USDC, USDT to Face More Liquidity Problems if The FED Hikes Interest Rates

If the U.S. Federal Reserve (FED) increases fund rates by another 75 bps on July 27, there will be more liquidity pressure on leading stablecoins, including USDC and USDT, a recent research report by Coinbase, a leading cryptocurrency exchange, suggests.

The Coinbase Report

The report authored by the exchange’s Head of Institutional Research and Senior Quantitative Researcher dubbed “The Elusive Bottom” predicts that more users would likely revert to fiat, heaping more pressure on stablecoin issuers should the central bank raise rates.

In their analysis, researchers found that the current APYs of 0.50 and 1.95 percent in DeFi platforms were relatively low to yields offered by short and medium-term Treasuries. Factoring in the runaway high inflation raving the U.S. and global economy, any rate hike by the FED would, in their estimation, see stablecoins’ market cap decrease.

As the crypto assets crashed in H1 2022, the market cap of USDT and USDC, two of the top stablecoins comprising 82 percent of the stablecoins market, fell in tandem. The report noted that the contraction was more pronounced in USDT, which saw $16.4 billion in net outflows. In contrast, USDC saw $6.5 billion in inflow since early May, rising up the market cap leaderboard.

Tether (USDT) Reducing Market Cap

The decrease in USDT’s market cap was pinned to market-wide concerns about their cash reserves and whether the issuer, Tether Holding, could guarantee that each USDT in circulation could be redeemed for USD. Further pressure was heaped due to the liquidity crisis of the Celsius Network, a centralized and regulated crypto lending platform.

Reports indicated that Tether Holding was the lead investor in Celsius’ early capital raise and later extended a $1.1 billion credit facility to Celsius, paying an interest of between five to six percent with BTC collateral. The position has since been liquidated and Celsius has filed for bankruptcy, as BlockMagnates reported.

The FED to Continue Rising Interest Rates

USDC and USDT are critical for crypto, bridging traditional finance and crypto. As crypto’s significance increases and the sector enjoined with the global economy, it is increasingly impacted by macroeconomic factors, including interest rate spikes.

Despite concerns, the FED will likely increase fund rates in late July 2022 to tame rising inflation and cushion citizens against rapid purchasing power erosion.