BIS published Stablecoin Flows and Spillovers to FX Markets. The core finding is that shocks originating in the stablecoin market spill over into traditional FX markets. Banks and exporters with zero crypto exposure end up paying more to borrow dollars.
The study uses daily data across four stablecoins (USDT, USDC, DAI, BUSD) and 27 fiat currencies. The hardest part of this kind of research is proving causation. When stablecoin inflows and exchange rate moves happen at the same time, it's impossible to tell whether the inflows caused the move or whether both were driven by the same underlying factor (say, economic instability).
The paper solves this by looking at traders who hop between exchanges in multiple countries, chasing price discrepancies. These traders have limited capital and allocate it to wherever the premium is highest. If stablecoin demand drops in Brazil, they shift capital to Korea. Brazil's demand shift has no reason to directly affect Korea's FX market, so by isolating the inflows that entered Korea through these traders' capital reallocation, the paper can test whether stablecoin inflows themselves cause FX effects.
The results are clear. A 1% increase in net stablecoin inflows simultaneously triggers three effects:
The stablecoin premium (the cost gap between buying stablecoins directly with local currency versus converting to USD first and then buying) rises by 40bp
The local currency depreciates by 5bp
Short-term dollar borrowing costs rise by 5-10bp
Why does this happen?
Large global banks like JPMorgan and Citi do two things at once. One is facilitating stablecoin-to-local-currency exchanges for clients. The other is providing FX swaps (transactions where the counterparty posts local currency and borrows dollars). When a bank takes KRW and hands over USDT in stablecoin brokerage, it accumulates KRW exposure. When it takes KRW and hands over USD in an FX swap, it also accumulates KRW exposure. Both types of KRW exposure stack on the same bank's balance sheet, pushing against risk limits. The bank's only options are to reduce swap provision or widen margins.
Meanwhile, direct dollar borrowing (USD bond issuance, US bank loans, money markets) doesn't flow through these banks' KRW balance sheets and remains unaffected. FX swaps are uniquely vulnerable because they share the same type of currency risk, on the same books, as stablecoin brokerage.
The paper simulates a hypothetical: "What if stablecoin brokerage and FX swaps shared the same books less?" If the two businesses were separated into distinct units so that only half the risk was pooled, the spillover into dollar borrowing costs would drop by about 50%, and the exchange rate impact would shrink by roughly a third. If the two were even more tightly linked, say run off the same desk, the spillover nearly doubles. The degree to which these risks are pooled within a bank directly determines the size of the spillover.
Two policy implications stand out:
Reducing friction in the stablecoin market itself (regulatory clarity, better on/off-ramp infrastructure) shrinks the premium while having only limited impact on traditional FX market stability. This is the safe policy lever.
Broad-based tightening of crypto access, on the other hand, actually worsens the problem of both markets sitting on the same bank books.
Korea is a particularly interesting case. The average KRW stablecoin premium is 2.51%, seven to eight times higher than EUR (0.31%), GBP (0.30%), or CHF (0.31%), currencies from economies of comparable stability. This isn't driven by macroeconomic weakness. It's driven by capital controls: restrictions on foreign exchange access, real-name requirements, and fund transfer regulations. The kimchi premium is evidence of regulatory friction in arbitrage, not economic fragility.
Capital controls compound the problem further. Without them, banks could disperse KRW exposure built up from stablecoin activity to overseas branches or offshore markets. In Korea, that exposure is trapped on the domestic balance sheet, stacking directly with FX swap exposure. The spillover is structurally larger.
Blocking stablecoin inflows outright isn't realistic. The two most actionable paths to reducing FX risk are:
Allow netting of crypto and FX exposures so they offset rather than stack, relieving the pressure on bank books
Improve stablecoin market accessibility to reduce the premium, without touching the structure that links both markets to the same books
The premium being high isn't the problem. The problem is that when the premium swings, it bleeds into traditional markets through bank balance sheets.
Luca Prosperi (Dirt Roads) published The Physics of On-Chain Lending, and ADCV (Steakhouse Financial) responded with a rebuttal. The central question is straightforward: are Morpho depositors being fairly compensated for the risk they take?
First, the structure. A depositor places USDC into Morpho. A borrower posts crypto collateral like ETH and borrows against it. There's no deposit insurance, no bank absorbing losses. The depositor is the lender, directly.
Two parameters determine the risk:
LTV 70%: borrowers can borrow up to 70% of their collateral value
LLTV 86%: if the debt-to-collateral ratio exceeds 86%, automatic liquidation kicks in
The borrower has a 16 percentage point cushion between 70% and 86%. The lender has an additional 14pp safety margin between 86% and 100% (insolvency). If the price declines gradually, a liquidation bot repays the borrower's debt to the lender and seizes the collateral, so the lender gets their money back. The lender only loses if the price crashes so fast that collateral value drops below the debt (100%) before any liquidation can fire.
This is where Luca and ADCV diverge.
Luca applies the 1974 Merton credit model. The core insight is that every collateralized loan is mathematically equivalent to "a safe bond + selling insurance." The depositor collects fixed interest while bearing the loss if collateral drops below a threshold, identical to collecting a premium and paying out when an accident occurs. The problem is that most depositors, especially those using frontends like Coinbase or Kraken, think of this as a "USDC savings account" rather than recognizing they're selling insurance.
So what's the fair price for this insurance?
By Luca's calculations, the interest premium depositors should demand ranges from 45bp to 400bp. Even with real-time rebalancing, the floor from sudden-crash risk alone is 45bp. Actual deposit rates sit at 0-20bp. A 10-20x mispricing, per this diagnosis.
ADCV's counter is concise: the math is right but the model is wrong.
Luca's model assumes the lender is fully exposed to collateral declines with no protective mechanism in place. But Morpho has a mechanism that revalues collateral every 12 seconds and triggers automatic liquidation when conditions are met.
The closest traditional finance analogy is a repo trade: lending cash against collateral (treasuries, etc.) with immediate margin calls when collateral value drops. Morpho executes this margin call every 12 seconds, with no human intervention, in a single transaction. Luca's model prices fire insurance as if the building has no sprinklers. Sprinklers don't eliminate fire risk, but ignoring them overstates the premium.
The most important technical difference is how much the lender actually loses when liquidation fires.
At the 86% trigger point, collateral is worth roughly 116% of the debt. The liquidator repays the lender in full, seizes the more valuable collateral, and pockets the ~14% difference as profit. The lender recovers 100%. That 14% comes from the borrower's collateral, not the lender's pocket. Luca plugged in a 5% lender loss rate, effectively miscounting the liquidator's profit as a lender cost.
Empirical data backs this up. Across 19,228 liquidation events and $500M in repayments on Steakhouse-curated vaults, total bad debt was $2.13. Not $2.13 million. Two dollars and thirteen cents. Plugging a conservative 0.3-0.5% lender loss rate into Luca's own model produces 3-30bp. Exactly what the market pays.
The conclusion splits by collateral type. For liquid crypto collateral like ETH and stETH, ADCV is right. The 12-second auto-liquidation effectively protects lenders. For illiquid collateral like private credit or RWAs, Luca is right. When the liquidation mechanism breaks down, the lender is back to selling insurance.
With illiquid collateral, every protection discussed above fails. Crypto collateral has real-time market pricing, per-block monitoring, single-transaction liquidation, and near-zero lender losses. Private credit and RWAs get priced weekly or quarterly, take days to months to liquidate (legal proceedings), and carry fire-sale discounts of 20-50%. Assets that are rarely marked appear far less volatile than they actually are, inflating the perceived safety margin.
How quickly and cheaply collateral can be sold determines whether the risk model holds at all. For liquid collateral, the market is pricing efficiently. For illiquid collateral, there isn't even consensus on what fair pricing looks like.
I was reading the Dune stablecoin report and came across the BRLA section, a Brazilian real-pegged stablecoin. Curious about how BRLA has embedded itself in traditional financial flows, I dug deeper.
BRLA is a BRL-pegged stablecoin issued by Avenia (rebranded from BRLA Digital in late 2025), backed 1:1 by BRL deposits and Brazilian government bonds. Lifetime processed volume exceeds $1.4B, yet market cap sits at roughly $3M. This gap reveals BRLA's true nature: it's not an asset anyone holds for long. It gets minted during a payment flow, used for settlement, and burned within seconds.
The problem BRLA solves is clear. PIX, Brazil's domestic payment system, is instant, free, and runs 24/7, but it stops at the border. Cross-border payments are stuck on legacy rails: 3.5% IOF tax (Brazil's foreign exchange transaction tax) on every trade, 2-4% bank FX spreads, correspondent bank fees, and 2-5 business day settlement. All-in cost for a typical SMB cross-border payment exceeds 6%.
Using USDC directly doesn't work either. USDC solves the middle of the pipe but not the endpoints. Cashing out USDC in Brazil requires finding an exchange that supports BRL withdrawal, completing KYC, paying a conversion spread, and settling via PIX/TED. BRLA is already BRL-denominated, so cashing out is a 1:1 redemption, not a currency conversion, just getting your money back.
The regulatory angle matters too. Brazil's central bank (BCB) classified stablecoin transactions as foreign exchange operations in its November 2025 resolutions. Using USDC for cross-border payments could trigger a 3.5% IOF levy. But BRL to BRLA isn't a foreign exchange event. You're putting in BRL and getting a BRL-denominated asset. The FX event only occurs when BRLA is swapped to USDC on-chain. Since the conversion happens on the blockchain rather than at the banking layer, IOF applicability may differ. This isn't settled yet. Over 850 companies are pushing back through industry associations, and Brazil's finance minister delayed the consultation in March 2026.
Services using BRLA include:
Avenia Pay is a B2B API platform built on top of BRLA. Over 90% of revenue comes from cross-border payments. Lifetime volume: R$3B+ ($1.4B+).
Picnic, a Brazilian self-custody wallet integrated with Gnosis Pay, lets users deposit BRL via PIX. The deposit mints BRLA, which is instantly swapped to USDC via 1inch and becomes a Visa card balance. BRLA exists for only a few seconds in this flow.
Fipto is a French payments company and the only entity in Europe holding both a fiat payment license (PI) and a crypto services license (MiCA CASP). They opened a EUR/BRL corridor with Avenia: EUR sent via SEPA gets converted to USDC by Fipto, moves on-chain, and Avenia converts it to BRL for PIX settlement.
Circle Arc/StableFX integration is another interesting direction. BRLA is one of eight launch partner stablecoins alongside AUDF (Australia), MXNB (Mexico), JPYC (Japan), KRW1 (Korea), and others. Once Arc mainnet launches, institutions holding USDC will be able to atomically swap into BRLA without needing a direct relationship with Avenia or a Brazilian FX dealer. An on-chain FX layer for emerging market currencies is taking shape.
BIS published Stablecoin Flows and Spillovers to FX Markets. The core finding is that shocks originating in the stablecoin market spill over into traditional FX markets. Banks and exporters with zero crypto exposure end up paying more to borrow dollars.
The study uses daily data across four stablecoins (USDT, USDC, DAI, BUSD) and 27 fiat currencies. The hardest part of this kind of research is proving causation. When stablecoin inflows and exchange rate moves happen at the same time, it's impossible to tell whether the inflows caused the move or whether both were driven by the same underlying factor (say, economic instability).
The paper solves this by looking at traders who hop between exchanges in multiple countries, chasing price discrepancies. These traders have limited capital and allocate it to wherever the premium is highest. If stablecoin demand drops in Brazil, they shift capital to Korea. Brazil's demand shift has no reason to directly affect Korea's FX market, so by isolating the inflows that entered Korea through these traders' capital reallocation, the paper can test whether stablecoin inflows themselves cause FX effects.
The results are clear. A 1% increase in net stablecoin inflows simultaneously triggers three effects:
The stablecoin premium (the cost gap between buying stablecoins directly with local currency versus converting to USD first and then buying) rises by 40bp
The local currency depreciates by 5bp
Short-term dollar borrowing costs rise by 5-10bp
Why does this happen?
Large global banks like JPMorgan and Citi do two things at once. One is facilitating stablecoin-to-local-currency exchanges for clients. The other is providing FX swaps (transactions where the counterparty posts local currency and borrows dollars). When a bank takes KRW and hands over USDT in stablecoin brokerage, it accumulates KRW exposure. When it takes KRW and hands over USD in an FX swap, it also accumulates KRW exposure. Both types of KRW exposure stack on the same bank's balance sheet, pushing against risk limits. The bank's only options are to reduce swap provision or widen margins.
Meanwhile, direct dollar borrowing (USD bond issuance, US bank loans, money markets) doesn't flow through these banks' KRW balance sheets and remains unaffected. FX swaps are uniquely vulnerable because they share the same type of currency risk, on the same books, as stablecoin brokerage.
The paper simulates a hypothetical: "What if stablecoin brokerage and FX swaps shared the same books less?" If the two businesses were separated into distinct units so that only half the risk was pooled, the spillover into dollar borrowing costs would drop by about 50%, and the exchange rate impact would shrink by roughly a third. If the two were even more tightly linked, say run off the same desk, the spillover nearly doubles. The degree to which these risks are pooled within a bank directly determines the size of the spillover.
Two policy implications stand out:
Reducing friction in the stablecoin market itself (regulatory clarity, better on/off-ramp infrastructure) shrinks the premium while having only limited impact on traditional FX market stability. This is the safe policy lever.
Broad-based tightening of crypto access, on the other hand, actually worsens the problem of both markets sitting on the same bank books.
Korea is a particularly interesting case. The average KRW stablecoin premium is 2.51%, seven to eight times higher than EUR (0.31%), GBP (0.30%), or CHF (0.31%), currencies from economies of comparable stability. This isn't driven by macroeconomic weakness. It's driven by capital controls: restrictions on foreign exchange access, real-name requirements, and fund transfer regulations. The kimchi premium is evidence of regulatory friction in arbitrage, not economic fragility.
Capital controls compound the problem further. Without them, banks could disperse KRW exposure built up from stablecoin activity to overseas branches or offshore markets. In Korea, that exposure is trapped on the domestic balance sheet, stacking directly with FX swap exposure. The spillover is structurally larger.
Blocking stablecoin inflows outright isn't realistic. The two most actionable paths to reducing FX risk are:
Allow netting of crypto and FX exposures so they offset rather than stack, relieving the pressure on bank books
Improve stablecoin market accessibility to reduce the premium, without touching the structure that links both markets to the same books
The premium being high isn't the problem. The problem is that when the premium swings, it bleeds into traditional markets through bank balance sheets.
Luca Prosperi (Dirt Roads) published The Physics of On-Chain Lending, and ADCV (Steakhouse Financial) responded with a rebuttal. The central question is straightforward: are Morpho depositors being fairly compensated for the risk they take?
First, the structure. A depositor places USDC into Morpho. A borrower posts crypto collateral like ETH and borrows against it. There's no deposit insurance, no bank absorbing losses. The depositor is the lender, directly.
Two parameters determine the risk:
LTV 70%: borrowers can borrow up to 70% of their collateral value
LLTV 86%: if the debt-to-collateral ratio exceeds 86%, automatic liquidation kicks in
The borrower has a 16 percentage point cushion between 70% and 86%. The lender has an additional 14pp safety margin between 86% and 100% (insolvency). If the price declines gradually, a liquidation bot repays the borrower's debt to the lender and seizes the collateral, so the lender gets their money back. The lender only loses if the price crashes so fast that collateral value drops below the debt (100%) before any liquidation can fire.
This is where Luca and ADCV diverge.
Luca applies the 1974 Merton credit model. The core insight is that every collateralized loan is mathematically equivalent to "a safe bond + selling insurance." The depositor collects fixed interest while bearing the loss if collateral drops below a threshold, identical to collecting a premium and paying out when an accident occurs. The problem is that most depositors, especially those using frontends like Coinbase or Kraken, think of this as a "USDC savings account" rather than recognizing they're selling insurance.
So what's the fair price for this insurance?
By Luca's calculations, the interest premium depositors should demand ranges from 45bp to 400bp. Even with real-time rebalancing, the floor from sudden-crash risk alone is 45bp. Actual deposit rates sit at 0-20bp. A 10-20x mispricing, per this diagnosis.
ADCV's counter is concise: the math is right but the model is wrong.
Luca's model assumes the lender is fully exposed to collateral declines with no protective mechanism in place. But Morpho has a mechanism that revalues collateral every 12 seconds and triggers automatic liquidation when conditions are met.
The closest traditional finance analogy is a repo trade: lending cash against collateral (treasuries, etc.) with immediate margin calls when collateral value drops. Morpho executes this margin call every 12 seconds, with no human intervention, in a single transaction. Luca's model prices fire insurance as if the building has no sprinklers. Sprinklers don't eliminate fire risk, but ignoring them overstates the premium.
The most important technical difference is how much the lender actually loses when liquidation fires.
At the 86% trigger point, collateral is worth roughly 116% of the debt. The liquidator repays the lender in full, seizes the more valuable collateral, and pockets the ~14% difference as profit. The lender recovers 100%. That 14% comes from the borrower's collateral, not the lender's pocket. Luca plugged in a 5% lender loss rate, effectively miscounting the liquidator's profit as a lender cost.
Empirical data backs this up. Across 19,228 liquidation events and $500M in repayments on Steakhouse-curated vaults, total bad debt was $2.13. Not $2.13 million. Two dollars and thirteen cents. Plugging a conservative 0.3-0.5% lender loss rate into Luca's own model produces 3-30bp. Exactly what the market pays.
The conclusion splits by collateral type. For liquid crypto collateral like ETH and stETH, ADCV is right. The 12-second auto-liquidation effectively protects lenders. For illiquid collateral like private credit or RWAs, Luca is right. When the liquidation mechanism breaks down, the lender is back to selling insurance.
With illiquid collateral, every protection discussed above fails. Crypto collateral has real-time market pricing, per-block monitoring, single-transaction liquidation, and near-zero lender losses. Private credit and RWAs get priced weekly or quarterly, take days to months to liquidate (legal proceedings), and carry fire-sale discounts of 20-50%. Assets that are rarely marked appear far less volatile than they actually are, inflating the perceived safety margin.
How quickly and cheaply collateral can be sold determines whether the risk model holds at all. For liquid collateral, the market is pricing efficiently. For illiquid collateral, there isn't even consensus on what fair pricing looks like.
I was reading the Dune stablecoin report and came across the BRLA section, a Brazilian real-pegged stablecoin. Curious about how BRLA has embedded itself in traditional financial flows, I dug deeper.
BRLA is a BRL-pegged stablecoin issued by Avenia (rebranded from BRLA Digital in late 2025), backed 1:1 by BRL deposits and Brazilian government bonds. Lifetime processed volume exceeds $1.4B, yet market cap sits at roughly $3M. This gap reveals BRLA's true nature: it's not an asset anyone holds for long. It gets minted during a payment flow, used for settlement, and burned within seconds.
The problem BRLA solves is clear. PIX, Brazil's domestic payment system, is instant, free, and runs 24/7, but it stops at the border. Cross-border payments are stuck on legacy rails: 3.5% IOF tax (Brazil's foreign exchange transaction tax) on every trade, 2-4% bank FX spreads, correspondent bank fees, and 2-5 business day settlement. All-in cost for a typical SMB cross-border payment exceeds 6%.
Using USDC directly doesn't work either. USDC solves the middle of the pipe but not the endpoints. Cashing out USDC in Brazil requires finding an exchange that supports BRL withdrawal, completing KYC, paying a conversion spread, and settling via PIX/TED. BRLA is already BRL-denominated, so cashing out is a 1:1 redemption, not a currency conversion, just getting your money back.
The regulatory angle matters too. Brazil's central bank (BCB) classified stablecoin transactions as foreign exchange operations in its November 2025 resolutions. Using USDC for cross-border payments could trigger a 3.5% IOF levy. But BRL to BRLA isn't a foreign exchange event. You're putting in BRL and getting a BRL-denominated asset. The FX event only occurs when BRLA is swapped to USDC on-chain. Since the conversion happens on the blockchain rather than at the banking layer, IOF applicability may differ. This isn't settled yet. Over 850 companies are pushing back through industry associations, and Brazil's finance minister delayed the consultation in March 2026.
Services using BRLA include:
Avenia Pay is a B2B API platform built on top of BRLA. Over 90% of revenue comes from cross-border payments. Lifetime volume: R$3B+ ($1.4B+).
Picnic, a Brazilian self-custody wallet integrated with Gnosis Pay, lets users deposit BRL via PIX. The deposit mints BRLA, which is instantly swapped to USDC via 1inch and becomes a Visa card balance. BRLA exists for only a few seconds in this flow.
Fipto is a French payments company and the only entity in Europe holding both a fiat payment license (PI) and a crypto services license (MiCA CASP). They opened a EUR/BRL corridor with Avenia: EUR sent via SEPA gets converted to USDC by Fipto, moves on-chain, and Avenia converts it to BRL for PIX settlement.
Circle Arc/StableFX integration is another interesting direction. BRLA is one of eight launch partner stablecoins alongside AUDF (Australia), MXNB (Mexico), JPYC (Japan), KRW1 (Korea), and others. Once Arc mainnet launches, institutions holding USDC will be able to atomically swap into BRLA without needing a direct relationship with Avenia or a Brazilian FX dealer. An on-chain FX layer for emerging market currencies is taking shape.
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