Digital Economy, Stablecoins, and the Global Financial System

The rise of the Digital Economy has the potential to reshape international financial markets and the role of traditional reserve assets such as the US dollar. While the creation of Stablecoins may increase the demand for safe dollar-denominated instruments due to reserve backing requirements, they may also serve as substitutes, reducing the global demand for traditional reserve assets. We develop a multicountry model featuring the US, the rest of the world, and a distinct Digital Economy to quantify the impact of the potential expansion of the digital economy. Our results show that, in the long run, the reserve demand effect dominates the substitution effect, leading to lower US interest rates and greater US foreign borrowing. We also find that the expansion of the Digital Economy increases idiosyncratic consumption volatility in the US, while reducing it in the rest of the world.