REALITY CHECK | Dollar Stablecoins Can Weaken Local Currencies, Says Bank of Korea Study

Demand for dollar-backed stablecoins can put downward pressure on local currencies when global exchanges allow investors to buy the tokens directly with fiat, according to a Bank of Korea study.

The study examined what happened after Binance introduced direct trading between local currencies, including the Brazilian real and Turkish lira, and dollar-pegged stablecoins such as USDT and USDC.

The researchers found that stablecoin premiums fell by 0.33 to 0.38 percentage points after Binance introduced fiat-stablecoin pairs while stronger demand for the tokens was associated with depreciation in local currencies against the dollar.

Brazil provided a clear example.

Investors can buy dollar stablecoins on Binance directly with Brazilian Reais, meaning rising demand can translate into actual dollar purchases. The study found that the Real depreciated 0.12% as stablecoin demand increased.

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The mechanism is different in South Korea where investors cannot directly buy stablecoins with Won on Binance. Domestic traders largely exchange existing stablecoin holdings among themselves meaning increased demand is reflected in stablecoin prices rather than directly in the foreign exchange market.

That could change if South Korea allows greater participation by corporations and foreign investors in domestic crypto exchanges, the study said. Such changes could narrow price differences between domestic and overseas stablecoins while strengthening the link between crypto markets and foreign exchange rates.

“If the market structure changes, with wider participation by corporations and foreigners in domestic virtual asset exchanges, the link between the stablecoin market and the foreign exchange market could strengthen,” said Kim Ji-hyun, a manager on the Bank of Korea’s international finance research team.

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The researchers recommended that digital asset regulatory reforms be pursued alongside efforts to internationalize the Won and improve the structure of South Korea’s foreign exchange market.

The findings add to growing concerns among central banks about the potential impact of dollar-backed stablecoins on monetary policy and currency stability as their use expands globally.