Negative Interest Rates And Variable Exchange Rates – Monetary Policy For A Fictional Papua New Guinean Cryptocurrency
This past week, Loi M. Bakani, governor of the Bank of Papua New Guinea (PNG), hosted a seminar to demonstrate the country’s dedication to blockchain technology. Bakani introduced the PNG Digital Commerce and Cryptocurrency Association, and discussed blockchain experimentation by the Bank of PNG. Afterward, the central bank posted slides from a presentation given by Dr. Ole Rummel, director of macroeconomic and monetary policy management at the South East Asian Central Banks Research and Training Center. Rummel theorized a fictional Papua New Guinean national cryptocurrency, the “BitKina,”and proposed three potential scenarios for the nation’s monetary policy.
Scenario 1: a world of fiat money with several privately-issued cryptocurrencies (i.e. the world right now);
Scenario 2: a world where cash has been officially abolished, a central bank-issued cryptocurrency is sole legal tender and all privately-issued cryptocurrencies have withered away because of competition with BitKina; and
Scenario 3: an intermediate scenario of cash, privately-issued cryptocurrencies and BitKina
In Scenario 1, or “the status quo,” Rummel concluded that the PNG central bank would maintain its control over monetary policy as long as privately-issued cryptocurrencies remain on the fringe of the financial world. Since the majority of transactions occur through traditional fiat channels, the central bank would retain its influence as a gatekeeper of finance.
Rummel called scenario 2 “BitKina rules supreme.” He imagined a financial mechanism akin to open market operations, wherein the PNG central bank controls the money supply by altering block rewards. It’s unclear why Rummel’s example maintained a mining system (especially since proof-of-stake could soon replace proof-of-work) and he neglected to consider a pre-mined national cryptocurrency. However, Rummel acknowledged, “One issue I note in passing is whether – and how – we allow nonresidents to hold BitKina.”
Rummel considered Scenario 3 the most likely to occur, with bitcoin and other non-fiat cryptocurrencies existing alongside a national cryptocurrency and traditional fiat currency. He called this “the middle ground.” Here, Rummel postulated two groundbreaking developments in monetary policy.
First, he proposed that the exchange rate between the Kina and the ‘BitKina’ does not need to be one-to-one. Varying this exchange rate, he suggested, could become another tool of the central bank. In his presentation, Rummel did not discuss how this may impact consumer behavior or spending, aspects that merit additional study.
Second, depending on the adoption of the national cryptocurrency, Rummel determined that “unconventional monetary policies,” such as a negative interest rates, might become possible.
The major drawback of scenario 3, Rummel explained, is that increasingly privatized lending could “severely diminish” the central bank’s role in the money multiplier process. His presentation ended with a brief discussion of central bank security, which, Rummel said, could be bolstered through decentralized blockchain protocols.
Rummel did not consider two other important scenarios. First, there could be a world in which Papua New Guinea’s central bank remains wholly dependent on tangible fiat currency. Second, down the road, the Bank of Papua New Guinea could fail in an attempt to transition to a national cryptocurrency.
For a country with a national GDP of approximately $17 billion (2014), it’s somewhat difficult to imagine a globally decentralized BitKina becoming a major economic force. As the Bank of Papua New Guinea considers the nation’s financial future, it would be wise to take advantage of the opportunities afforded by blockchain technology and recognize the limitations of the country’s size. Close study will be required to judge whether small nations should adopt national cryptocurrencies.