Digital finance may tighten dollar's grip on global markets
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New research presented at the Jackson Hole symposium suggests financial innovation, including stablecoins, may reinforce the U.S. dollar's dominance in global finance. The paper argues digitalization could intensify network effects favoring the dollar, even as concerns grow about U.S. fiscal health.
Key Facts
- The dollar is on one side of roughly 90% of foreign-exchange transactions, according to the paper.
- The paper's authors are Gordon Liao of Circle, Eswar Prasad of Cornell University, and Tony Zhang of Arizona State University.
- Circle issues USDC, one of the world's largest dollar-backed stablecoins.
- The euro, yen, and pound have lost ground in global finance, while the Chinese renminbi has gained at their expense.
The Jackson Hole Paper
The paper was presented at the annual Jackson Hole symposium, where financial innovation was the central theme. Authors Gordon Liao, Eswar Prasad, and Tony Zhang argue that making currencies easier to access and transact could steer more financial activity toward those that already dominate global finance. They wrote that digitalization could intensify network effects rather than dissipate them.
Stablecoin Mechanism
The authors use stablecoins—digital tokens backed by traditional assets—to model how new financial technologies could reinforce the dollar's dominance. They find that more companies would choose to borrow in dollars, creating more demand for dollar assets and making dollar markets deeper and more attractive to other borrowers. The paper states that issuance begets issuance.
Risks and Spillovers
The authors warn that a more dollar-reliant world, propelled by new technologies, comes with greater exposure of other countries to spillovers from U.S. policies. Greater demand for tokenized Treasuries could also concentrate risk in that market, particularly if it leads to less fiscal discipline in Washington.
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Digital finance may tighten dollar's grip on global markets
