Stablecoin flows and spillovers to FX markets
Summary
Focus
Stablecoin markets have grown rapidly, with more than 70% of fiat-to-stablecoin conversions originating from non-US dollar currencies. Since buying a dollar-pegged stablecoin with a local currency is effectively a foreign exchange (FX) transaction, this growth has given rise to a parallel, crypto-based FX ecosystem. How connected is this new ecosystem to traditional currency markets? And can stablecoin activity generate pressures on exchange rates and dollar funding conditions?
Contribution
This paper provides one of the first systematic assessments of the interplay between stablecoin and traditional FX markets. Using granular data on four major US dollar-pegged stablecoins traded against 27 fiat currencies across 64 exchanges from 2021 to 2025, we document large and persistent price gaps (or parity deviations) between buying dollar exposure via stablecoins and via traditional markets. We then develop a theoretical framework that explains how stablecoin demand in one country can spill over to exchange rates and dollar funding conditions globally, and use it to guide an empirical strategy that isolates the causal effects of stablecoin flows.
Findings
Stablecoin activity does not stay confined to the crypto ecosystem. An exogenous surge in stablecoin demand depreciates the local currency in the traditional spot market and raises the cost of obtaining dollars through FX swaps. These spillovers arise because intermediaries connecting stablecoin and traditional markets face limited balance sheet capacity: accommodating higher stablecoin demand forces them to adjust positions across markets, transmitting pressure to exchange rates and funding costs. The effects are particularly pronounced when intermediary balance sheets are already stretched. Emerging market currencies, where parity deviations are largest and arbitrage is weakest, are most exposed. These findings suggest that the rapid growth of stablecoins is creating new channels of financial transmission that warrant close attention from policymakers.
Abstract
Using data on four USD-pegged stablecoins and 27 fiat currencies, this paper documents spillovers from stablecoin-based foreign exchange (FX) to traditional FX markets. We document a gap between the cost of acquiring dollars via stablecoins and via the spot FX market (parity deviations). To establish a causal link between stablecoin flows and FX markets, we use a granular instrumental variable that exploits idiosyncratic shocks to stablecoin net inflows in other currencies. Our estimates indicate that a 1% exogenous increase in net stablecoin inflows raises parity deviations by 40 basis points, depreciates the local currency, and widens the dollar premium in synthetic funding markets (covered interest parity (CIP) deviations). A model of constrained arbitrage rationalizes these findings and provides structural foundations for the identification strategy. Counterfactual simulations show that halving cross-market frictions would attenuate CIP spillovers by roughly one-half and cut exchange rate effects by nearly one-third. A dynamic extension that closely matches the empirical impulse responses shows that spillovers grow disproportionately when intermediaries suffer losses, as depleted capital reduces their capacity to absorb further shocks. Our results establish stablecoins as an emerging segment of global currency markets with direct implications for financial stability.
JEL classification: F31, G15, G12, G23, F38
Keywords: stablecoins, foreign exchange, market segmentation, capital flows, arbitrage
