Dollar-Backed Stablecoins Push Local Currencies Lower, Bank of Korea Study Finds

New research from South Korea's central bank reveals that trading pressure in dollar-pegged stablecoins correlates with depreciation of local currencies as market makers rebalance positions.

A new study from the Bank of Korea has uncovered a direct correlation between dollar-backed stablecoin trading activity and the depreciation of local currencies in emerging markets, raising fresh concerns about the systemic impact of crypto assets on national monetary systems.

The research focused on Binance-paired currency markets, where buying pressure in stablecoins like USDT and USDC appears to trigger local currency weakness as market makers adjust their positions to maintain liquidity across trading pairs. The mechanism works through the continuous need for market makers to balance their exposure when traders convert local currencies into dollar-pegged tokens.

When users purchase stablecoins using their local currency on exchanges, market makers must hedge their position by selling that local currency in broader forex markets or by adjusting their inventory. This creates sustained selling pressure that can drive down the value of emerging market currencies, particularly during periods of high stablecoin demand.

The findings suggest that stablecoin markets may be creating a new channel for capital flight that operates outside traditional banking surveillance. Unlike conventional dollar purchases that move through regulated financial institutions and appear in balance of payments data, stablecoin conversions can happen peer-to-peer or through offshore exchanges with limited visibility to central banks.

The Bank of Korea's research comes as regulators worldwide grapple with stablecoin oversight. While Singapore recently proposed 100% reserve backing requirements and yield bans, the new study suggests that even fully-backed stablecoins can exert pressure on monetary sovereignty through their trading dynamics rather than through reserve inadequacy.

For investors and traders in emerging markets, the research highlights an often-overlooked cost of using stablecoins as a dollar proxy. What appears to be a simple conversion into a stable asset may collectively contribute to weakening the local currency, potentially triggering a feedback loop where currency depreciation drives more citizens toward stablecoins, further accelerating the decline.

The study's release coincides with growing adoption of stablecoins across Asia and Latin America, where citizens increasingly use dollar-pegged tokens as inflation hedges and cross-border payment tools. Central banks now face the challenge of monitoring stablecoin flows with the same rigor they apply to traditional foreign exchange markets, though the decentralized nature of crypto trading makes this significantly more difficult.