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"Virtual asset system overhaul, a task linked to won internationalization"
The Bank of Korea has analyzed that if a specific country's fiat currency and stablecoin transactions are supported on global virtual asset exchanges, it could affect the foreign exchange market.
In the 'BOK Issue Note: Linkage between Dollar Stablecoins and the Foreign Exchange Market' report released on the 3rd, the BOK presented this analysis based on data from 2019-2025 for 12 currencies, including the Euro and Turkish Lira, which are supported for trading on the overseas exchange Binance.
Transactions of dollar stablecoins using a specific currency are similar to trading dollar-denominated assets with that currency, and depending on the participation of global intermediaries, they could lead to actual foreign exchange transactions and exchange rate fluctuations.
The report assumed that when a specific fiat currency begins to be supported for trading on Binance, a market structure is formed where global intermediaries, who can access both the dollar stablecoin market and the foreign exchange market, participate, and then analyzed the resulting impact.
This analysis was based on the observation that, unlike domestic virtual asset exchanges, global intermediaries such as liquidity providers (LPs), professional market makers, and hedge funds operate on overseas virtual asset exchanges like Binance to facilitate smooth transactions.
According to the study, Binance's support for fiat currency trading enables the participation of global intermediaries, which significantly reduces the 'premium,' the price difference between dollar stablecoins and spot exchange rates.
Furthermore, the participation of global intermediaries who can also access the foreign exchange market was found to strengthen the relationship between the supported fiat currency and its exchange rate against the US dollar, as stablecoin demand shocks influenced exchange rates.
For fiat currencies supported for trading on Binance, when there was net buying pressure on stablecoins, the stablecoin premium rose, and at the same time, the domestic currency weakened, leading to an increase in the exchange rate.
In contrast, for unsupported currencies like the Korean Won, only the stablecoin premium rose under the same circumstances, and the impact on the exchange rate was limited.
As such, the domestic virtual asset market has limited participation from foreigners and corporations, and global intermediaries also do not participate, so the impact of virtual asset market volatility on exchange rates has been minimal.
Cho Sang-heum, head of the BOK's International Finance Research Team, explained, "This suggests that if the market structure changes in the future, such as increased participation of corporations and foreigners in domestic virtual asset exchanges, the linkage between the stablecoin market and the foreign exchange market could strengthen."
He added, "The internationalization of the won and the improvement of the foreign exchange market structure will buffer the shocks from the linkage between the two markets by expanding the base of market participants and foreign exchange market liquidity. This should be viewed as a task mutually linked with the overhaul of virtual asset regulations."
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