If you are making a short trade (seling), system will match your trade with a BTC loan and sell that BTC for fiat. Only your BTC balance is changed from the transaction, your fiat balance is unaffected since there is also unrealized PnL to be taken into account. Daily interest is also calculated in BTC.
When your BTC balance is not enough to pay daily interest, system will use your fiat balance to buy more BTC at current price for payment. Note that this over time can result in your fiat balance becoming too low and can lead to a margin call.
Similarly, if you are making a long trade (buying), system will match your trade with a fiat loan and use that amount to buy BTC. Only your fiat balance is changed. Daily interest is calculated in fiat.