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
Facts Only
Stablecoin markets have grown rapidly, with over 70% of fiat-to-stablecoin conversions coming from non-US dollar currencies.
The study analyzes four major USD-pegged stablecoins traded against 27 fiat currencies across 64 exchanges from 2021 to 2025.
Large and persistent price gaps (parity deviations) exist between buying dollar exposure via stablecoins and traditional FX markets.
A 1% exogenous increase in net stablecoin inflows raises parity deviations by 40 basis points.
Stablecoin demand surges depreciate local currencies in traditional spot markets.
Stablecoin activity increases the cost of obtaining dollars through FX swaps, widening covered interest parity (CIP) deviations.
Intermediaries connecting stablecoin and traditional markets face limited balance sheet capacity.
Effects are more pronounced when intermediary balance sheets are already stretched.
Emerging market currencies experience the largest parity deviations and weakest arbitrage.
The study uses a granular instrumental variable exploiting idiosyncratic shocks to stablecoin net inflows in other currencies.
Counterfactual simulations suggest halving cross-market frictions would reduce CIP spillovers by half and exchange rate effects by nearly one-third.
The research spans JEL classifications F31, G15, G12, G23, and F38.
Executive Summary
Full Take
The strongest version of this narrative highlights a critical evolution in global finance: stablecoins are no longer isolated within crypto ecosystems but are actively shaping traditional FX markets. The research rigorously documents how stablecoin demand generates spillovers, depreciating local currencies and tightening dollar funding conditions. By grounding its claims in granular data and a theoretical model of constrained arbitrage, the analysis avoids exaggeration and presents a measured case for policymaker attention. The focus on emerging markets—where parity deviations are largest and arbitrage weakest—underscores the asymmetric risks posed by this new financial infrastructure.
Pattern scan: The narrative avoids emotional exploitation or distortion, presenting findings with academic precision. However, the framing of stablecoins as a "parallel FX ecosystem" could subtly imply a binary choice between traditional and crypto markets, potentially oversimplifying their interplay. The emphasis on financial stability risks, while justified, might also echo historical patterns of regulatory caution toward financial innovation, where perceived threats to systemic stability are prioritized over potential efficiencies.
Root cause: The underlying paradigm assumes that financial markets are interconnected but segmented, with intermediaries acting as constrained conduits between systems. This reflects broader trends in financial globalization, where technological innovation outpaces regulatory adaptation. The unstated assumption is that traditional FX markets remain the dominant framework, with stablecoins as a disruptive but secondary force—a framing that may underestimate the potential for crypto-native systems to redefine global finance entirely.
Implications: For human agency, this means individuals and institutions in emerging markets face new vulnerabilities, as stablecoin flows can amplify currency volatility and funding costs. The beneficiaries are likely those with access to arbitrage opportunities or deep balance sheets, while the costs fall disproportionately on economies with weaker financial infrastructure. Second-order consequences could include regulatory crackdowns on stablecoins or the emergence of new hedging instruments to manage these spillovers.
Bridge questions: How might stablecoin issuers or decentralized finance (DeFi) protocols adapt to mitigate these spillovers? Could the observed parity deviations reflect inefficiencies that innovative market structures could exploit, rather than purely systemic risks? What historical precedents exist for parallel financial systems eventually merging with or displacing traditional ones?
Counterstrike scan: If this were part of a coordinated influence campaign, the playbook might involve exaggerating the destabilizing effects of stablecoins to justify preemptive regulatory action or to discredit crypto markets. However, the content aligns with academic rigor rather than alarmism, focusing on measurable spillovers and theoretical mechanisms. No structural alignment with manipulation patterns is detected.
Patterns detected: none