Outlook on 'Dollar Stablecoins' from Jackson Hole: "Dollar Hegemony Will Strengthen"

As dollar-based stablecoins spread, there is an analysis suggesting that the international dominance of the U.S. dollar may actually strengthen. Source: ChatGPT

As dollar-based stablecoins spread, there is an analysis suggesting that the international dominance of the U.S. dollar may actually strengthen. Some have raised concerns that if bank deposits shift to stablecoins, the effectiveness of central bank monetary policy could weaken, and the impact of U.S. monetary policy on other countries could increase.

On the 28th (local time), at the Jackson Hole Economic Policy Symposium held in Wyoming, USA, Eswar Prasad, a professor at Cornell University, presented a paper titled "Financial Innovation and the International Monetary System" co-authored with Gordon Liao, a researcher at Circle, and Tony Zhang, a professor at Arizona State University.

The theme of this year's Jackson Hole Symposium is "Financial Innovation: Implications for Payments and Policy." Prasad presented his paper in the session on "Financial Innovation and the International Monetary System," with Catherine Mann, a member of the Bank of England's Monetary Policy Committee, participating as a discussant.

Prasad's Paper: "Dollar Stablecoins Strengthen Dollar Dominance"

According to the paper co-authored by Professor Prasad and others, while the share of the dollar in foreign exchange reserves has been declining for a long time, it still maintains an overwhelming position in international payments, foreign exchange transactions, and international bonds.

The paper states that the dollar's share in global foreign exchange reserves has decreased from 72% in 2000 to 57% in the first quarter of this year. In contrast, the euro has not significantly replaced the dollar, and the share of the yuan has also dropped from 3% in 2022 to 2% in the first quarter of this year.

The situation is different in international payments. Excluding payments within the Eurozone, the dollar's share in international payments stands at 59%, while the euro accounts for only 14%. In trade finance, the dollar's share reaches 82%. The dollar's inclusion in one side of foreign exchange market transactions is also about 90%.

The researchers noted that in this context, dollar-based stablecoins are likely to strengthen rather than weaken the dollar's dominance.

Using dollar stablecoins allows companies and investors around the world to more easily access dollar-denominated assets and utilize them for cross-border payments. In particular, it is explained that a structure may form where the demand for stablecoins leads to demand for U.S. safe assets, as stablecoin issuers hold dollar assets such as U.S. Treasury bonds as reserve assets.

In the researchers' example model, in the absence of stablecoins, the share of dollar-denominated debt issuance by emerging market companies was 36%, while the share of local currency issuance was 64%. In contrast, when dollar stablecoins were introduced, the share of dollar issuance increased to 88%, while the share of local currency decreased to 12%. The researchers explained this as a result of "dollar stablecoins expanding the use of dollars." However, this figure is not an actual market forecast but an illustrative result set by the researchers.

Professor Prasad suggested that after financial innovation, the international monetary system could develop in three directions: a concentration of power in top currencies like the dollar, coexistence of several currencies with strong institutions, regulations, and financial markets, or fragmentation of currency zones leading to increased vulnerabilities in financial markets.

The researchers believe that if the current policies and institutional trends continue, the first scenario of "concentration of financial power" is the most likely. However, they explained that if countries improve payment technologies and deepen financial markets while strengthening macroeconomic, regulatory, and institutional frameworks, there is room for competition with the dollar.

Catherine Mann: "Stablecoins May Weaken Monetary Policy Effectiveness"

Catherine Mann, a member of the Bank of England's Monetary Policy Committee, who participated as a discussant in the same session, generally agreed with the research findings of Professor Prasad and others but focused on the potential impact of stablecoin proliferation on national monetary policies.

In the Jackson Hole discussion materials, Mann assessed that based on the research model of Professor Prasad and others, "the likelihood that financial innovations represented by stablecoins will weaken the dollar's dominance is low."

She emphasized the need to examine not only the financial stability resulting from the spread of stablecoins but also their implications for monetary policy.

Mann analyzed that if people shift their bank deposits to stablecoins, which do not pay interest, the transmission effect of central bank monetary policy could weaken.

Moreover, as the use of dollar stablecoins increases, the exposure of various economies to the dollar may rise, making them more susceptible to U.S. monetary policy, global financial market conditions, and changes in investor sentiment. This could also impact exchange rates and the balance of payments.

She also mentioned the possibility that stablecoins could amplify volatility in financial markets. Mann suggested that news regarding stablecoin regulations, short-term arbitrage between platforms, and changes in reserve asset composition could transmit volatility to the wholesale funding markets of banks or the UK government bond market.

She emphasized that even as financial innovation expands, central bank money must maintain a core benchmark role in important transactions within the financial system. Additionally, she stated that further research is needed to understand the impacts of financial innovations, including stablecoins, on the economy and financial markets.

Ultimately, the research by Professor Prasad and the discussion by Mann focused on how the spread of dollar stablecoins could influence not only the emergence of new payment methods but also the international monetary system and national monetary policies.

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