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

Research from South Korea's central bank has uncovered a concerning relationship between the growth of dollar-denominated stablecoins and the weakening of local currencies in emerging markets. The study examined trading patterns across major cryptocurrency exchanges and found consistent correlations between increased stablecoin activity and depreciation in local currency values, particularly when these assets are traded in currency pairs on platforms like Binance.

The mechanism underlying this phenomenon relates to how market makers operate in these cryptocurrency markets. When demand for dollar-backed stablecoins increases relative to local currencies, market makers must rebalance their positions to maintain equilibrium. This process of position balancing effectively channels buying pressure toward stablecoins and away from local currencies, creating artificial downward pressure on emerging market exchange rates.

The implications of these findings extend beyond cryptocurrency markets into the realm of traditional monetary policy. Central banks in emerging economies have long struggled to manage currency depreciation through various policy tools, and this research suggests that stablecoin trading activity represents an additional force complicating their efforts. As digital asset markets continue to grow in size and liquidity, their influence on exchange rates may become increasingly significant.

The Bank of Korea's research underscores the need for regulatory frameworks that account for cryptocurrency market dynamics. Policymakers must grapple with how to address the interaction between decentralized digital asset markets and traditional currency markets, particularly in jurisdictions where local currencies are vulnerable to external pressures. Without proper oversight, stablecoin ecosystems could amplify currency volatility and undermine monetary policy effectiveness in emerging economies.