Interest Rates in Swaptacular

In Spectacular, the issuer of each digital currency can publicly declare an interest rate, which will be applied to all accounts in the given currency. For example: If I create my own currency, and I declare an interest rate of 5% on it, then for everyone that holds my currency (and therefore I owe them something in return), every year, there will be an automatic 5% increase in the amount that I owe them.

The issuer can even declare a negative interest rate. For example: If I set an interest rate of -5% for my currency, then every year, there will be an automatic 5% decrease in the amount that I owe to my creditors.

This ability of issuers to control the interest rate on their currencies is very important, indeed. It allows the issuers to indirectly influence the amount of their currency in circulation.

Imagine somebody whose digital currency is very popular, stable, and highly trusted. Inevitably, people will start hoarding this currency, using it more and more as a store of value, and less and less to buy things with it. Depending on the situation, this may, or may not be what the issuer wants. For example:

• If the issuer sells durable goods, he/she will most probably need to keep some amount of goods in store. Normally, the more currency there is in circulation, the more goods must be kept in store, to back the issued currency. In this situation, lowering the interest rate, even to a negative number, is a reasonable thing to do. This would discourage hoarding, and encourage buying of the issuer’s goods.

• If the issuer has enough collateral, in the form of real estate, to back the currency, but he/she urgently needs money for investment or servicing debt, then increasing the interest rate might be a clever thing to do. This would encourage the hoarding of the issuer’s currency, and may allow him/her to issue more IOUs into existence.

Isn’t charging interest a bad thing?

Well, it depends. It can be a very bad thing. Especially when powerful people legitimize the perpetual robing of powerless people, by calling the process “payment of lawful debt”.

But this is not the case in Swaptacular!

In Swaptacular, the debtors (the issuers of digital currencies) determine the interest rate that they pay to their creditors. You see, if a debtor feels that the interest rate on his debt is too high, he can simply lower it, even to a rather negative number. Obviously, by doing so, the issuer may totally destroy the confidence in his currency, but nevertheless, this is a perfectly legal thing to do.