Stablecoins such as USDT and USDC are designed to be maintained around $1 regardless of interest rates.

But for the companies that issue these stablecoins, the interest rate levels can significantly change the profitability of this business.

When customers exchange 1 dollar for stablecoins, the issuers receive assets that must be used to support the tokens. Large issuers typically do not leave this money idle but instead allocate most of their reserves to short-term U.S. Treasury bonds, overnight repurchase agreements, money market instruments, and bank deposits.

These assets generate interest, while holders of stablecoins typically still hold a token valued at about $1.

The reserve disclosure of Circle shows that the reserves of USDC include short-term U.S. Treasury bonds, overnight Treasury bond repurchases, and cash held in regulated financial institutions.

Higher interest rates can turn reserves into a huge revenue engine.

The basic economic logic is very simple.

If a stablecoin company has $100 billion in reserves and a yield of 1%, these assets can generate approximately $1 billion in interest income each year before deducting expenses.

If the yield rate is 5%, the same level of reserves could generate approximately $5 billion.

Stablecoins themselves do not need to undergo any changes. The issuers simply earn more profits from the assets that back the same number of tokens.

This is also why the yield on U.S. Treasury bonds is becoming increasingly important for the economic models underlying stablecoin reserves.

Circle shows that income is very sensitive to changes in interest rates

Circle provides a clear example, as the company has publicly disclosed its reserve income related to USDC.

In the second quarter of 2026, the company achieved reserve income of $668 million, which represents growth compared to the same period last year. The reason for this is the expansion in the USDC circulation. At the same time, the average yield on reserves, as indicated by Circle, decreased by 66 basis points, which partially offset the benefits brought about by the increase in stablecoin balances.

This highlights two main factors behind this business model.

The more stablecoins in circulation there are, the more reserve assets that generate interest there are. The lower the interest rate, the less income each dollar in these reserves produces.

Therefore, even if the supply of USDC continues to grow, a downward interest rate environment may also reduce the profitability per dollar of reserves.

Tether demonstrated this model on a larger scale.

Tether operates on the same basic model with a larger reserve base.

As of the end of the second quarter of 2026, the company reported assets of approximately $187.8 billion and a quarterly net operating profit of about $1.5 billion.

A considerable portion of its reserves is held in U.S. Treasury bonds and repurchase agreements. Earlier in 2026, the company reported that its direct and indirect exposure to U.S. Treasury bonds was approximately $141 billion.

At this scale, even relatively small changes in short-term interest rates can have a significant impact on profits.

For assets with interest-bearing amounts of $100 billion, a change of 1 percentage point in yield results in an annualized income change of about $1 billion, before deducting fees.

Why Would the Fed's Interest Rate Cuts Harm Stablecoin Issuers?

The same mechanism will also work in the reverse direction.

In the short term, U.S. Treasury bonds will mature frequently and be replaced by new securities priced at current market yields. If the Federal Reserve cuts interest rates, the issuers will gradually reinvest their reserves at lower interest rates.

This means that even if the circulation of stablecoins remains unchanged, reserve income may still decline.

Emitters can compensate by increasing the token supply, providing payment services, hosting products, or engaging in other businesses, but this relationship remains very direct nonetheless.

The higher the interest rate, the more productive each dollar of reserves is. The lower the interest rate, the less revenue the issuer can obtain from the same balance sheet.

This is why high interest rates may not be comfortable for borrowers and investors, yet at the same time, they create one of the most favorable environments for stablecoin issuers.