Stablecoin Trading Weakens Local Currencies, BOK Warns

The Bank of Korea has released a report warning that trading in dollar-pegged stablecoins can weaken local currencies. The easier it is to buy and sell these stablecoins with a local currency, the greater the impact on exchange rates.

According to the report, when Binance began supporting trading between dollar stablecoins and specific countries' legal tenders, the premium for these coins narrowed significantly by 0.33 to 0.38 percentage points. This reduced demand led to a downward trend in those countries' currencies against the U.S. dollar.

In Brazil, for example, where buyers can purchase dollar stablecoins on Binance directly with their own currency, demand for these coins translated into actual dollar purchases, pushing the real-dollar exchange rate up 0.12%, a depreciation of the real.

The Bank of Korea notes that in South Korea, an increase in buyers of dollar stablecoins is unlikely to translate into actual dollar purchases due to limited participation by corporations and foreign investors in the domestic crypto market. However, if this changes, it could strengthen the link between the stablecoin market and the foreign exchange market.

Kim Ji-hyun, a manager on the international finance research team at the Bank of Korea's International Department, said that if the market structure changes through wider participation by corporations and foreign investors in domestic crypto exchanges, the link between the stablecoin market and the foreign exchange market could strengthen. He recommended that efforts to overhaul digital asset rules be pursued in tandem with internationalizing the won and improving the structure of the foreign exchange market.