New research presented at the Jackson Hole symposium argues that financial innovation may tighten the dollar's grip on global finance rather than reduce it. The study challenges the prevailing view that new technologies are making it faster and cheaper to move money across borders, thereby diminishing reliance on the U.S. currency. Instead, the authors contend that these innovations could strengthen the position of currencies that already dominate global markets.
Gordon Liao, Eswar Prasad, and Tony Zhang authored the paper. Liao is an economist at Circle, while Prasad works at Cornell University and Zhang is based at Arizona State University. They argue that making currencies easier to access and transact in could steer more financial activity toward dominant players. "Rather than dissipating network effects by leveling the playing field ... digitalization could intensify them," the authors stated. This perspective is significant because dollar dominance provides the U.S. with substantial financial clout and helps sustain demand for its debt, even as concerns mount regarding America's fiscal health.
The researchers use stablecoins, which are digital tokens backed by traditional assets, to model this dynamic. They find that increased accessibility leads more companies to choose to borrow in dollars. This behavior creates higher demand for dollar assets, making dollar markets deeper and more attractive to other borrowers. The authors describe this cycle by noting that "Issuance begets issuance." Circle, one of the co-authors' affiliated institutions, issues USDC, one of the world's largest dollar-backed stablecoins.
Current data indicates the dollar remains firmly dominant in global finance, despite rising U.S. debt and geopolitical tensions. The paper reports that the dollar is on one side of roughly 90% of foreign-exchange transactions. While the euro, yen, and pound have lost ground, the Chinese renminbi has gained share at their expense.
However, the authors warn that a more dollar-reliant world propelled by new technologies carries specific risks. They note that this shift "comes at the cost of greater exposure of other countries to spillovers from U.S. policies." Additionally, greater demand for tokenized Treasuries could concentrate risk in that market, particularly if it leads to "less fiscal discipline" in Washington.