Stablecoins Are an Interest Rate Business. What Happens When Rates Fall?

As the Federal Reserve's policymakers meet this week, most crypto commentary will focus on how their decision affects bitcoin. A quieter but arguably more important question concerns stablecoins, the dollar-pegged tokens that now serve as the plumbing of the crypto economy. Their total supply has grown into the hundreds of billions of dollars, and most of that money is invested in short-term US government debt. For the companies that issue them, stablecoins are, at heart, an interest rate business.

That makes them unusually sensitive to monetary policy, and it explains why the question of who receives the yield on stablecoin reserves has become one of the most contested issues in financial regulation.

How the business works

When a customer buys a stablecoin, the issuer receives dollars and holds reserves to back the token one for one. Under the GENIUS Act, signed in July 2025, US-regulated issuers must hold high-quality liquid assets such as cash, Treasury bills and certain repurchase agreements. The issuer earns interest on those reserves. The customer, who holds the token, earns nothing: the law prohibits issuers from paying interest or yield directly to holders.

When short-term rates were above 5 percent in 2023 and 2024, this model was extraordinarily profitable. The largest issuers reported billions of dollars in annual profits, mostly from interest income. Circle's stock market listing in June 2025 gave outside investors a direct view of those economics, and made clear how much its revenue depends on the level of short-term rates and on distribution arrangements with partners.

The rate sensitivity

The Fed cut rates three times in the second half of 2025, and policy rates are now well below their 2023 peak. Each quarter-point cut reduces the interest earned on reserves. For an issuer with tens of billions of dollars in reserves, that means hundreds of millions of dollars less revenue per year, all else equal. Issuers can offset the effect by growing their supply, which is why they are pushing hard into payments, remittances and partnerships with banks and fintech companies.

The table is simple arithmetic, but it captures the key point. Lower rates do not threaten a stablecoin's peg; they threaten its issuer's profits and the incentives it can offer to distributors. That affects how aggressively stablecoins can compete with bank deposits and payment networks.

Distribution costs compound the pressure. Issuers often share a large portion of their reserve income with exchanges and payment partners that bring in users. When rates fall, the pie shrinks but those partners still expect their cut. Renegotiating such deals, or finding new revenue from transaction fees and services, becomes a priority for management teams whose business was built in a high-rate world.

The stablecoin industry's most important product manager sits on the Federal Open Market Committee.

The fight over yield

Because issuers cannot pay interest directly, some crypto exchanges and platforms have offered holders rewards funded by their share of reserve income. Banks argue that these rewards amount to interest-bearing deposits by another name, and that allowing them would draw deposits out of the banking system, reducing the funds available for lending. Crypto firms respond that rewards are a legitimate way to compete and that consumers deserve a share of the income their money generates.

The issue has become a central point of contention in the negotiations over broader crypto market structure legislation in the Senate. It is a genuine policy dilemma. If stablecoins can offer yields close to Treasury rates, they could become a serious competitor to bank deposits, which would change how credit is created. If they cannot, they remain a payment tool whose economics favor issuers and distributors rather than users.

Wider effects on crypto markets

Stablecoin economics matter for the rest of crypto too. Stablecoins are the main source of liquidity on exchanges and in decentralized finance. When rates are high, holding stablecoins in a bank-like product is relatively attractive, and some capital sits idle. When rates fall, investors seeking returns may deploy stablecoins into riskier crypto strategies, which can support token prices and lending activity.

• Lower rates: thinner issuer margins, more pressure to grow supply, more capital searching for yield in crypto markets.
• Higher rates: fatter issuer profits, more stablecoin demand as a cash-like product, less risk appetite in token markets.
• Regulatory outcome on rewards: determines whether holders, platforms or issuers capture the rate income.

Stablecoin issuers have also become meaningful buyers of Treasury bills. Their demand, while still small relative to the total market, is now large enough that analysts track it as a factor in short-term funding markets. Some policymakers have welcomed that demand as a new source of funding for the government; others worry about what happens if a large issuer faces heavy redemptions and has to sell bills quickly.

What to watch

The outcome of this week's Fed meeting will matter less for stablecoins than the path of rates over the next year. A sustained move lower would push issuers toward growth and new revenue sources, and could intensify the fight over rewards. Also worth watching are implementation rules under the GENIUS Act from US regulators, the progress of market structure legislation, and the growth of bank-issued stablecoins and tokenized deposits, which could compete directly with the incumbents.

Stablecoins began as a crypto trading tool. They have become a vehicle for exporting dollars and holding Treasury bills, with economics that track the Fed almost exactly. Understanding them means understanding interest rates first and crypto second. This article is for information and is not investment advice.