Digital Dollar Dominance: Economists Weigh the Risks and Rewards

According to economists Gordon Liao, Eswar Prasad, and Tony Zhang, digitalization could reinforce the US dollar's dominance in global finance. They argue that making currencies easier to access and transact in could steer more financial activity toward those that already dominate global finance.

The authors use stablecoins, such as Circle's USDC, to model how new financial technologies could intensify the dollar's network effects. Their research suggests 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.

This phenomenon is already evident in global finance, where the dollar remains firmly dominant, on one side of roughly 90% of foreign-exchange transactions. The euro, yen, and pound have lost ground, while the Chinese renminbi has gained at their expense.

While digitalization could strengthen the dollar's position, it also comes with its own risks, such as greater exposure to spillovers from US policies. Additionally, increased demand for tokenized Treasuries could concentrate risk in that market and lead to 'less fiscal discipline' in Washington.