As the issuance and use of USD stablecoins have expanded, policy interest in the linkages between USD stablecoin markets and conventional foreign exchange markets has increased. In particular, trading USD stablecoins against non-U.S. fiat currencies is similar in nature to trading dollar-denominated assets with those currencies and, depending on market structure, may translate into actual foreign exchange transactions and exchange rate movements. Existing studies typically assume a market structure in which global intermediaries with access to both markets participate as counterparties in fiat–USD stablecoin transactions. Under such a structure, global intermediaries can sell USD stablecoins and subsequently adjust the non-U.S. fiat currency positions they receive in the FX market. In practice, however, fiat–USD stablecoin transactions do not always take place under such a market structure. This paper focuses on this variation and examines how the participation of global intermediaries affects linkages between the two markets.
To identify this effect, we exploit the introduction of specific fiat–USD stablecoin trading pairs on Binance, a global exchange whose liquidity providers are already active in both stablecoin and FX markets, as an event that creates a market structure in which these global intermediaries can participate directly as counterparties. Following the introduction of a trading pair, global intermediaries can draw on global stablecoin liquidity to meet the demand of investors holding the relevant fiat currency and adjust the resulting fiat currency positions in the FX market. This market structure can strengthen both price integration, whereby stablecoin prices converge more closely to spot exchange rates, and shock transmission, whereby demand shocks originating in the stablecoin market are transmitted to exchange rates through FX transactions.
The empirical results support both channels. In terms of price integration, USD stablecoin premia decline significantly following the introduction of Binance trading pairs, and stablecoins flow from Binance into local markets when local premia exceed those on Binance. In terms of shock transmission, stablecoin premia have only a limited effect on the relevant U.S. dollar exchange rate before the introduction of a trading pair, whereas after pairing, higher premia are associated with significant local currency depreciation. Moreover, net buyer-initiated order flow, which captures demand pressure in the stablecoin market, is significantly associated with depreciation of the paired currencies. By contrast, in Korea, where no such Binance trading pair is available, net buying pressure is primarily reflected in higher stablecoin premia and has no significant effect on the exchange rate.
These findings suggest that linkages between USD stablecoin and FX markets could strengthen as Korea’s digital asset market structure evolves, particularly with greater participation by corporations and foreign investors. Accordingly, digital asset regulation should be considered together with efforts to promote the internationalization of the Korean won and deepen FX market liquidity to strengthen the market’s capacity to absorb shocks.