Stablecoin flows create spillovers to traditional FX markets

The paper documents a significant gap between the cost of acquiring dollars via stablecoins and through the spot FX market, termed parity deviations.

Utilizing a granular instrumental variable, the research establishes a causal link: a one percent exogenous increase in net stablecoin inflows raises parity deviations by approximately 40 basis points.

This also depreciates the local currency and widens the dollar premium in synthetic funding markets, specifically covered interest parity (CIP) deviations.

These findings underscore stablecoins as an emerging segment of global currency markets, directly influencing financial stability.

The study uses daily data on four USD-pegged stablecoins traded against 27 fiat currencies from January 2021 to November 2025, identifying substantial and volatile parity deviations, particularly in economies experiencing macroeconomic instability or capital flow management measures.

A theoretical model of constrained arbitrage rationalizes the observed spillovers, providing structural foundations for the identification strategy.

This model features balance-sheet-constrained intermediaries connecting stablecoin and traditional FX markets, facing costs dependent on total currency exposure.

Cross-country linkages arise from cross-book traders allocating a finite conversion budget across countries, creating the granular instrumental variable.

Counterfactual simulations demonstrate 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 shows spillovers grow disproportionately when intermediaries suffer losses, as depleted capital reduces their capacity to absorb further shocks.