Stablecoins’ Expanding Influence: How Digital Currencies Impact Traditional Forex Markets

The burgeoning market for USD-pegged stablecoins is no longer confined to the cryptocurrency ecosystem. Its growing scale and reach are now exerting tangible influence on traditional foreign exchange (FX) markets, a phenomenon recently highlighted by the Bank of Korea (BOK).

In a recent study, the BOK revealed that when global exchanges introduce trading pairs between local fiat currencies and USD stablecoins, buying pressure within the stablecoin market can transmit to the physical FX market. This transmission, facilitated by arbitrageurs and liquidity providers, shows a significant correlation with the depreciation of local currencies.

BOK Research Uncovers Direct Stablecoin-FX Linkages

Released on September 3, the BOK’s research, titled “Stablecoin–FX Linkages: Evidence from Fiat–Stablecoin Pair Listings on a Global Exchange,” specifically analyzed the interrelationship between the stablecoin market and conventional FX markets. The study focused on the introduction of new fiat-to-USD stablecoin trading pairs on the global exchange Binance as a key event.

Prior to the activation of these trading pairs, the study observed that any premium on local USD stablecoins primarily reflected within the crypto market itself, with limited direct impact on the USD exchange rate against local currencies. However, a significant shift occurred after Binance listed the relevant fiat trading pairs: the price linkage between the two markets markedly increased.

Crucially, the research found a more pronounced depreciation of local currencies when USD stablecoins exhibited a higher premium relative to the local exchange rate. Furthermore, “net buyer-initiated order flow” — a metric representing the underlying demand pressure for stablecoins — was significantly correlated with the depreciation of the fiat currency involved in the trading pair.

The Mechanism: How Stablecoin Demand Translates to FX Pressure

The mechanism behind this transmission is surprisingly straightforward.

Consider a scenario where investors heavily purchase USDT or USDC using their local currency. Global market makers, who facilitate these transactions by supplying USD stablecoins, simultaneously accumulate large amounts of the local currency. To mitigate their own foreign exchange risk, these market makers are likely to sell the accumulated local currency in the traditional FX market and buy back USD.

In essence, the flow is: Increased Local Currency → Increased USDT/USDC Demand → Market Makers Accumulate Local Currency → Market Makers Sell Local Currency & Buy USD in FX Market → Depreciation Pressure Transmitted to Traditional FX Market.

The BOK noted that South Korea currently lacks a direct Binance KRW fiat trading pair. Consequently, stablecoin buying pressure in the Korean market is primarily observed as a “Korea premium” on stablecoins, without a similarly significant direct impact on the Korean Won (KRW) exchange rate yet.

However, the BOK cautions that should Korean enterprises, foreign investors, and global market makers deepen their involvement in the digital asset market, the connection between stablecoins and the KRW FX market could strengthen considerably. This prospect leads the BOK to advocate that digital asset regulation must not be treated in isolation from foreign exchange policy discussions. Concurrently, efforts should be made to enhance the internationalization of the KRW and deepen the domestic foreign exchange market.

Global Stablecoin Market Nears $300 Billion Mark

The heightened attention on this research is inextricably linked to the rapid expansion of USD stablecoins. As of September 7, CoinGecko data indicates that the total market capitalization of global stablecoins stands at approximately $291 billion. USDT alone accounts for around $183.4 billion, while USDC contributes roughly $74.5 billion. Combined, these two dominant stablecoins command nearly $258 billion, representing almost 90% of the entire stablecoin market.

This immense scale signifies that stablecoins are evolving beyond mere “pricing tools” within crypto exchanges. They are increasingly forming a multi-hundred-billion-dollar on-chain USD system. For economies characterized by smaller local currency scales and more open capital markets, a substantial conversion of local currency into USD stablecoins by residents could trigger effects akin to traditional “dollarization” or capital flight.

Taiwan’s Central Bank Echoes Similar Concerns

The BOK’s latest findings hold particular relevance for Taiwan. The Central Bank of the Republic of China (Taiwan), in its stablecoin policy analysis published earlier this year, explicitly stated that since most mainstream stablecoins are pegged 1:1 to the USD, the public’s use of local currency to purchase USD stablecoins “essentially still involves an exchange between the local currency and USD.”

Even if transactions migrate from traditional banks to Virtual Asset Service Providers (VASPs), these service providers, in their efforts to manage inventory and exchange rate risks, will likely adjust their USD positions through the conventional banking system. Therefore, the Central Bank concluded that “USD demand derived from stablecoin transactions will ultimately be transmitted to the physical foreign exchange market.”

Further reinforcing its stance, Taiwan’s Central Bank cited research from the Bank for International Settlements (BIS), the International Monetary Fund (IMF), and the Hong Kong Monetary Authority. These studies suggest that arbitrage activities may intensify when a price discrepancy emerges between USD stablecoin prices and traditional USD spot exchange rates. During periods of significant market volatility, high-frequency arbitrage could not only inflate foreign exchange trading volumes but also amplify exchange rate fluctuations.

Thus, Korea’s recent empirical results offer compelling new market evidence, validating the transmission mechanism previously put forth by Taiwan’s Central Bank.

Taiwan Establishes Legal Framework for Stablecoin Regulation

Taiwan’s regulatory landscape is also entering a pivotal new phase. The “Virtual Asset Service Act,” promulgated on July 22, 2026, officially defines stablecoins as “virtual assets linked to the value of one or more fiat currencies to maintain stable value.” Under this new law, any stablecoin intended for issuance in Taiwan must first secure permission from the Financial Supervisory Commission (FSC), which, crucially, must consult with and obtain the Central Bank’s consent prior to approval.

The legislation directly integrates foreign exchange risk into its regulatory framework. Article 36 mandates that stablecoin issuers must maintain full reserve assets, deposited in domestic financial institutions. Should the issuance involve foreign exchange, it must comply with Central Bank regulations. Both the FSC and the Central Bank are tasked with jointly formulating subsidiary regulations pertaining to reserve assets, reserve requirements, issuance, and redemption processes.

This robust framework signifies that future policy discussions in Taiwan, whether concerning the development of New Taiwan Dollar (TWD) stablecoins or the increased integration of USD stablecoins into the local trading system, can no longer be confined solely to “cryptocurrency regulation.” They will directly encompass foreign exchange management and broader monetary policy considerations.

The Strategic Value of TWD Stablecoins: Mitigating Dollarization?

The BOK’s research prompts another critical question for Taiwan: In the absence of competitive TWD-denominated digital currency tools, will USD stablecoins gradually become the de facto unit of account for the on-chain economy?

Given that USDT and USDC currently dominate the vast majority of the global stablecoin market, an increasing reliance on USD stablecoins for Taiwan’s cross-border payments, Web3 investments, and tokenized financial products could lead to more frequent conversions between the New Taiwan Dollar and USD stablecoins.

Beyond fostering payment innovation, this presents a potentially more significant strategic imperative for a TWD stablecoin policy: to ensure the New Taiwan Dollar retains its crucial functions of accounting and payment within the on-chain financial system, thereby curbing the extent of “dollarization” as digital finance evolves.

The BOK’s latest findings unequivocally demonstrate that stablecoins and traditional foreign exchange markets are no longer distinct financial systems. As trading platforms, market makers, and cross-border capital channels become increasingly interconnected, what once was merely buying demand for USDT or USDC within the crypto market can ultimately transform into a direct demand for US dollars in the conventional foreign exchange market.

For Taiwan, the “Virtual Asset Service Act” represents merely the foundational step in institutional development. The true challenge and opportunity lie in how the forthcoming stablecoin subsidiary regulations address foreign currency stablecoins, TWD stablecoins, reserve assets, and fiat trading pairs on platforms. These critical details will ultimately determine Taiwan’s ability to simultaneously foster digital financial innovation while effectively managing the spillover risks to the New Taiwan Dollar’s exchange rate stability and monetary sovereignty.

Related Content: Taiwan’s FSC Drafting Nine Subsidiary Regulations for Virtual Assets, Expected to Take Effect by Q1 2027