New financial technologies are making it faster and cheaper to move money across borders, seemingly reducing the world’s reliance on the dollar.

• But new research presented at the Jackson Hole symposium suggests financial innovation may instead tighten the dollar’s grip on global finance.
• Financial innovation is the theme for the annual gathering of central bankers, where they’re grappling with how these technologies reshape the financial system.

Why it matters: Dollar dominance gives the U.S. enormous financial clout and helps keep demand for its debt strong.

• If the paper is right, stablecoins and other forms of tokenized money could strengthen that position, even as concerns grow about America’s fiscal health.

What they’re saying: The authors argue that making currencies easier to access and transact in could steer more financial activity toward those that already dominate global finance.

• “Rather than dissipating network effects by leveling the playing field … digitalization could intensify them,” wrote Gordon Liao, Eswar Prasad and Tony Zhang, economists at Circle, Cornell University and Arizona State University, respectively.
• Circle issues USDC, one of the world’s largest dollar-backed stablecoins.

Zoom in: 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.
• “Issuance begets issuance,” Liao, Prasad and Zhang wrote.

By the numbers: The dollar remains firmly dominant in global finance, even as rising U.S. debt and geopolitical tensions test the foundations of its dominance.

• The paper says the dollar is on one side of roughly 90% of foreign-exchange transactions. It notes the euro, yen and pound have lost ground, while the Chinese renminbi has gained at their expense.

The other side: The authors warn that a more dollar-reliant world, propelled by new technologies, comes with its own risks.

• It “comes at the cost of greater exposure of other countries to spillovers from U.S. policies,” they noted.
• Greater demand for tokenized Treasuries could also concentrate risk in that market, particularly if it leads to “less fiscal discipline” in Washington.