Bank for International Settlements working paper finds stablecoin inflow shocks spill over to spot FX and raise synthetic dollar funding costs

The Bank for International Settlements has published a working paper assessing how USD-pegged stablecoin activity connects with traditional foreign exchange (FX) markets, finding that stablecoin demand shocks can transmit into spot exchange rates and FX swap-based dollar funding conditions rather than remaining confined to crypto markets. Using daily exchange-level data on four major USD-pegged stablecoins (USDT, USDC, DAI and BUSD) traded against 27 fiat currencies across 64 exchanges from 2021 to 2025, the paper documents large and persistent “parity deviations” between the cost of obtaining dollar exposure via stablecoins and via traditional FX. A granular instrumental-variable approach attributes causality to stablecoin flows, estimating that a 1% exogenous increase in net stablecoin inflows raises parity deviations by about 40 basis points, depreciates the local currency by around 5 basis points, and widens the dollar premium in synthetic funding markets (covered interest parity deviations) by about 5–10 basis points. The mechanism is framed as constrained arbitrage: intermediaries linking stablecoin and traditional markets face limited balance sheet capacity, so absorbing higher stablecoin demand forces position adjustments that push through to exchange rates and FX swap pricing, with emerging market currencies identified as particularly exposed. Counterfactual simulations indicate that halving cross-market frictions would reduce covered interest parity spillovers by roughly one-half and cut exchange rate effects by nearly one-third, while a dynamic extension suggests spillovers can intensify disproportionately when intermediaries suffer losses and balance sheets become stretched.