CASE STUDY: MONETARY POLICY AND DIGITAL CURRENCY

Monetary policy refers to the actions undertaken by a nation's central bank to control the
money supply and achieve sustainable economic growth. Monetary policy can be broadly
classified as either expansionary or contractionary. However, as highlighted in Belke et al.
(2011), the global financial crisis of 2007–2008, on the one hand, and the "Euro crisis" on the
other, have seriously challenged the stability (and sustainability) of the current global
monetary system. Hence, there is a need to revisit and improve the monetary system of the
country. This issue is critical as He (2018)1 has argued that the renewed scepticism in some
quarters regarding the central bank's monopoly on the issuance of currency has led to the
creation of Bitcoin and other crypto-assets. The crypto-assets has challenged the paradigm of
state-supported currencies and the dominant role of central banks and conventional
institutions in the financial system. Also, these crypto assets may one day serve as alternative
means of payment and, possibly, units of account, which would reduce the demand for fiat
currencies or central bank money.

In the context of Malaysia, the monetary policy in 2021 remains accommodative as it aims to
focus on supporting a sustainable economic recovery amid modest price pressures. The
Economic and Monetary Review, 2020 by BNM states that the domestic monetary and
financial conditions for this year are expected to remain conducive by the significant
reductions in the Overnight Policy Rate (OPR) throughout 2020. Due to the COVID-19
economic shock, BNM also called for the complementary use of monetary, fiscal and
financial sector policies, including the use of more targeted and sector-specific measures for
the affected segments of the economy to support and secure a sustainable economic recovery.
In the case of digital assets, digital currencies are not recognised as legal tender in Malaysia.
This does not mean that they are illegal, however. 'Legal tender' refers to a currency that is
used as an official medium of payment. The Malaysian government does regulate digital asset
exchanges, which are the platforms that can be used to trade Bitcoin and other digital
currencies. Hence any digital asset exchange that wants to operate in Malaysia has to comply
with a set of regulations issued by the Securities Commissions (SC) of Malaysia. These
regulations require exchanges to have robust measures in place to protect users and their
assets.

1
https://www.imf.org/external/pubs/ft/fandd/2018/06/central-bank-monetary-policy-and-
cryptocurrencies/he.htm
Case Study Structure
Choose any one (1) country as a case study. In conducting this case study research, you are
required to adopt the following protocol:

1. Briefly describe the concept and objectives of the monetary policy of the country that
you choose.
(5 marks)

2. Explain by providing examples of any current monetary policy measure taken by the
central bank during the COVID-19 pandemic for economic recovery.
(10 marks)

3. Briefly describe the characteristics of cryptocurrency.

(5 marks)

4. Examine the nature of cryptocurrency as an alternative to fiat money as the means of

payments that may infleuce the monetory policy.
(10 marks)

5. In your opinion, how Islamic monetary policy can provide their role to facilitate a fair
and equitable financial system.
(10 marks)

(Total: 40 marks)
References

Belke, A. and Beretta, E. (2020) From cash to central bank digital currencies and
cryptocurrencies: a balancing act between modernity and monetary stability, Journal of
Economic Studies, 47 (4) pp. 911-938.

He, D. (2018) Monetary policy in the digital age, Finance and Development, 55(2). Retrived
at https://www.imf.org/external/pubs/ft/fandd/2018/06/central-bank-monetary-policy-and-
cryptocurrencies/he.htm