The easier it is to buy and sell dollar stablecoins with a local currency, the more that trading translates into actual dollar demand and affects exchange rates, according to a new study. As more market participants trade dollar stablecoins in won, the won-dollar exchange rate could rise more sharply, meaning a weaker won.
According to a Bank of Korea report titled "BOK Issue Note: Linkages Between Dollar Stablecoins and the Foreign Exchange Market," released on the 3rd, the premium at which dollar stablecoins trade above the actual value of the dollar narrowed by a significant 0.33 to 0.38 percentage points after the overseas exchange Binance began supporting trading between dollar stablecoins and the legal tender of specific countries, including the euro and the Turkish lira.
At the same time, the tendency for rising demand for dollar stablecoins to translate into weakness in those countries' currencies against the U.S. dollar grew stronger.
In Brazil, for example, where investors can buy dollar stablecoins on Binance directly with their own currency, demand for the coins fed through into actual dollar purchases, pushing the real's exchange rate against the U.S. dollar up 0.12%, a depreciation of the real.
In South Korea, an increase in buyers of dollar stablecoins is unlikely to translate into actual dollar purchases. Because stablecoins cannot be bought directly with won on Binance, domestic investors trade holdings among themselves. Even when demand surges, it is reflected only in stablecoin prices and does not directly affect the exchange rate. The domestic virtual asset market is also centered on retail investors, as participation by corporations and foreigners remains restricted.
That could change if the domestic virtual asset market opens up. Greater participation by corporations and foreigners would narrow price gaps between domestic and overseas stablecoins but could deliver a shock to the foreign exchange market.
"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 international finance research team at the Bank of Korea's International Department. The manager 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.
