Expect Crypto Bulls to Flock Back as Fed Cuts Rates

Welcome back to Distributed Ledger. This is Frances Yue, crypto reporter at MarketWatch. In the latest developments affecting the cryptocurrency landscape, the Federal Reserve has made a significant move by cutting its policy rate for the first time in four years, decreasing it by half a percentage point. According to data from CME FedWatch, futures traders are pricing in the possibility of another 100 basis points of cuts by the end of this year. This brings to the forefront the question: How might these rate cuts impact the crypto space?

A Resurgence in Decentralized Finance?

To gain insights into this, I reached out to Chris Rhine, a portfolio manager at SPDR Galaxy ETFs. Rhine believes that certain decentralized finance (DeFi) lending protocols could see a revival due to the Federal Reserve’s decision. DeFi refers to financial services built on blockchain technology that enable peer-to-peer transactions, thus eliminating the need for intermediaries. Typically, these transactions are facilitated by smart contracts—automated computer programs that execute actions when specific conditions are met.

The initial surge in DeFi activity, commonly referred to as the “DeFi summer,” occurred in 2020 when the Federal Reserve began its rate cuts in response to the COVID-19 pandemic. This period was characterized by the emergence of decentralized lending platforms and exchanges like Aave, Compound, MakerDAO, and Uniswap. Investors were drawn to DeFi back then, looking to capitalize on attractive yields—some borrowing rates for cryptocurrencies on decentralized platforms soared to as high as 30%.

Impact of the Rate-Hiking Cycle

However, the landscape dramatically shifted when the Fed initiated its rate-hiking cycle in March 2022. The interest rate hikes rendered the yields from DeFi protocols less appealing as traditional risk-free rates steadily climbed. At one point, U.S. Treasury bills were yielding over 5%, prompting a retreat from riskier assets. As a result, the total value locked in DeFi protocols plummeted, dropping to a cycle low of under $40 billion in December 2022. This was a stark contrast to the almost $180 billion peak reached in November 2021. As of Tuesday, the value locked in DeFi protocols rebounded slightly, standing at approximately $87 billion, according to data from DefiLlama.

Now, with the Fed cutting rates once more, Rhine suggests that the DeFi space could see renewed interest as investors look for higher returns amid an environment of falling rates. He also emphasizes the importance of monitoring the supply of stablecoins, a category of cryptocurrency whose value is pegged to other assets. An increase in the supply of stablecoins typically signals growing demand for cryptocurrencies and more funds entering blockchain ecosystems.

Other Noteworthy Developments

In addition to market dynamics, notable legal proceedings and settlements have occurred in the crypto world. Recently, U.S. District Judge Lewis Kaplan sentenced Caroline Ellison, the former girlfriend of FTX co-founder Sam Bankman-Fried and the last CEO of his hedge fund, Alameda Research, to two years in prison. Ellison played a crucial role in the fraud that involved Bankman-Fried diverting billions in customer deposits from the FTX exchange to Alameda Research. Despite her involvement, her cooperation with authorities led prosecutors to seek a lenient sentence.

In another significant event, crypto companies TrustToken and TrueCoin (now operating under the name Archblock) settled with the U.S. Securities and Exchange Commission (SEC) over charges of fraudulent and unregistered sales involving their stablecoin TrueUSD, which is meant to maintain a 1:1 value with the U.S. dollar. The SEC’s allegations claimed that a substantial portion of TrueUSD’s reserves had been invested in high-risk offshore funds. Each company agreed to pay civil penalties of $163,766, while TrueCoin will also return over $370,000 in profits and interest. They did not admit or deny wrongdoing in the settlement.

Conclusion

As the Federal Reserve’s rate cuts take effect, the cryptocurrency market stands poised for potential revitalization, especially within the DeFi sector. Investors should remain vigilant, not only regarding market trends but also the evolving regulatory landscape affecting crypto companies. With renewed interest in cryptocurrencies on the horizon, the digital asset space could be gearing up for another wave of investment, akin to the notable activities witnessed during the previous DeFi boom.