Dollar-backed stablecoins can push local currencies lower, Bank of Korea study finds

A technical research paper published by the Bank of Korea reveals a direct structural vector through which dollar-backed stablecoins exacerbate the depreciation of local fiat currencies. Central bank researchers demonstrated that spikes in buying pressure for crypto-assets paired against US dollar stablecoins on offshore exchanges—most notably Binance—consistently trigger downward pressure on domestic exchange rates. Rather than acting purely as isolated, speculative crypto ecosystems, offshore stablecoin order books generate cross-border capital friction that spills over into sovereign foreign exchange markets through the automated rebalancing actions of institutional liquidity providers. The transmission mechanism operates via structural arbitrage between domestic fiat-to-crypto venues and dominant global liquidity pools. When demand shifts toward USDT- or USDC-denominated pairs on international platforms, a localized price disparity emerges relative to local fiat pairs on domestic exchanges, such as South Korea’s Upbit or Bithumb. To capture this spread and hedge market-making inventory risk, delta-neutral market makers and high-frequency trading desks execute complex triangular arbitrage. This process necessitates liquidating local currency balances and acquiring USD-pegged assets through over-the-counter (OTC) desks or spot foreign exchange markets, effectively generating synthetic capital flight that suppresses local currency valuations against the greenback. These algorithmic arbitrage flows present profound financial security and macro-prudential challenges for monetary authorities. In jurisdiction-bound economies that utilize capital controls or closely monitor foreign exchange reserves, dollar-denominated stablecoins function as an unmonitored shadow rail for foreign currency outflows. The Bank of Korea’s empirical findings suggest that stablecoins act as borderless conduits, effectively extending US dollar liquidity dominance deep into domestic markets at the direct expense of central bank monetary autonomy. Consequently, conventional foreign exchange intervention models are increasingly blunted by real-time crypto liquidity shifts operating outside traditional SWIFT clearing systems and institutional settlement windows. Market sentiment among institutional desks and sovereign policy architects is rapidly shifting as regulators digest these structural vulnerabilities. While quantitative crypto trading firms view these cross-venue price spreads as standard market efficiencies, central bankers view them as systemic channels of foreign exchange volatility. Industry observers anticipate that regulatory bodies will respond by imposing stringent reporting mandates on high-volume OTC stablecoin desks, restricting cross-border order routing, or mandating capital buffer reserves for fiat-to-crypto gateways. As dollar-pegged stablecoins consolidate their role as the primary settlement layer for digital financial markets, central banks are coming to realize that managing currency stability now requires actively managing crypto liquidity rails.