BOK warns foreign participation in crypto market could amplify won volatility

If corporations and foreign investors are allowed to participate in South Korea's virtual asset market, volatility in that market could spill directly into the foreign exchange market and amplify exchange rate swings, the Bank of Korea warned Thursday.

The central bank cautioned that when global intermediaries such as Binance become involved, buying pressure on dollar stablecoins can translate immediately into dollar demand in the foreign exchange market, pushing down the value of the won.

Kim Ji-hyun and Jo Sang-heum, senior officials at the BOK's International Finance Research Team, published the findings Thursday in a BOK Issue Note titled "Linkage between Dollar Stablecoins and the Foreign Exchange Market." The report analyzed data from 2019 to 2025 covering 12 currencies — including the euro and the Turkish lira — supported for trading on the overseas exchange Binance.

The analysis found that dollar stablecoin transactions conducted in a given currency closely resemble trades in dollar-denominated assets using that same currency, meaning they can lead to actual foreign exchange transactions and exchange rate movements depending on whether global intermediaries are involved.

The report said that once Binance begins supporting trading in a particular fiat currency, a market structure emerges in which global intermediaries with access to both the stablecoin market and the foreign exchange market become active participants. Unlike domestic virtual asset exchanges, overseas platforms such as Binance attract liquidity providers, professional market makers, hedge funds and other global intermediaries to facilitate smooth trading.

According to the research, Binance's support for fiat currency trading enables the participation of these global intermediaries and significantly narrows the "premium" — the price gap between dollar stablecoins and the spot exchange rate. When global intermediaries with foreign exchange market access are involved, stablecoin demand shocks feed through to exchange rates, strengthening the relationship between supported fiat currencies and their dollar exchange rates.

For fiat currencies supported on Binance, net purchase pressure on stablecoins caused the stablecoin premium to rise while the local currency simultaneously weakened. By contrast, unsupported currencies such as the won saw only the stablecoin premium rise under the same conditions, with exchange rate effects remaining limited.

South Korea's virtual asset market has seen limited participation by foreign investors and corporations, and global intermediaries have not been active in it, keeping the exchange rate impact of crypto market volatility minimal.

"This suggests that if the market structure changes — for instance, through expanded participation by corporations and foreign investors in domestic virtual asset exchanges — the linkage between the stablecoin market and the foreign exchange market could strengthen," Jo said. "Won internationalization and improvements to the foreign exchange market structure will help buffer shocks from that linkage by broadening the participant base and expanding foreign exchange market liquidity. These efforts need to be viewed as tasks interconnected with the overhaul of the virtual asset regulatory regime."