Impact of Stablecoins on Exchange Rate Volatility

This technical report assesses the impact of stablecoins on exchange rate volatility in emerging market economies (EMEs) and discusses the associated policy implications. It documents the increasing adoption of stablecoins, particularly those pegged to the US dollar, in EMEs where financial systems are often less developed. The report outlines how stablecoin transactions can lead to higher exchange rate volatility for EME currencies, especially when stablecoin prices are unstable. It emphasizes the need for robust regulatory frameworks to mitigate these risks, suggesting that such frameworks can promote price stability of stablecoins and dampen volatility in exchange rates. The report also reviews the mechanisms through which stablecoin transactions influence exchange rates and presents empirical evidence linking increased stablecoin activity with greater volatility in EME currencies. The findings highlight the importance of regulatory measures to enhance the stability of stablecoins and reduce potential spillover effects on foreign exchange markets.