The Paradox of Dollar Dominance

Foreign Affairs | Gordon Liao, Eswar Prasad, Tony Zhang

Digital financial innovations and blockchain tokenisation are reshaping international currency exchange, yet these technological developments are paradoxically solidifying the dominance of the United States dollar rather than eroding it. Emerging payment networks and tokenised financial assets initially enabled foreign central banks and commercial entities to bypass dollar-denominated clearing systems.

However, market adoption of digital assets created a turning point that reinforced existing monetary hierarchies. Stablecoins now exceed $250 billion in circulation. Crucially, over 99 percent of that total value remains pegged directly to the dollar and backed by United States Treasury securities. Although the dollar's share of global foreign exchange reserves dropped from 71 percent in 2000 to 57 percent today, alternative reserve currencies remain fragmented. The euro holds only 13 percent of non-eurozone cross-border payments, while the Chinese renminbi accounts for under 3 percent. Consequently, technological integration lowers transaction costs while entrenching American currency hegemony by default.

Comment

The reliance of private stablecoin issuers on short-dated U.S. Treasury bills creates an unintended structural subsidy for American sovereign borrowing. By requiring high liquidity reserves to maintain parity, platforms operating tokenised dollars absorb substantial volumes of short-term debt issued by the U.S. Department of the Treasury. This structural absorption suppresses short-term yields, directly lowering federal borrowing costs even amid rising fiscal deficits.

This liquidity dynamic operates through primary dealer networks and reserve custody protocols rather than traditional central bank reserves. Automated smart contracts programmatically mandate underlying asset allocation toward Treasury bills, effectively converting decentralised financial activity into persistent demand for American sovereign obligations. Consequently, the Clearing House Interbank Payments System (CHIPS) remains the foundational backend for global liquidity settlement despite tokenised front-end innovation.

Strategic Question for Discussion

If sovereign issuers increasingly develop national central bank digital currencies, will private tokenised demand for U.S. Treasury bills sustain the Clearing House Interbank Payments System (CHIPS) as the primary global settlement backend, or will bilateral clearing mechanisms fragment that liquidity?

The available evidence points toward continued structural reliance on dollar-denominated settlement, because non-dollar digital clearing mechanisms currently lack the deep liquid secondary markets provided by U.S. Treasury bills. While bilateral payment channels like China's Cross-Border Interbank Payment System reduce direct friction, they fail to offer comparable automated yield generation or reserve stability. Consequently, digital fragmentation will likely remain constrained to regional trade corridors rather than displacing central dollar-clearing infrastructure.

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