The Bank Indonesia logo adorns the front gate of the central bank on Jl. Thamrin in Central Jakarta in this file photo.- JP
JAKARTA (The Jakarta Post/ANN): Bank Indonesia (BI) is mulling the idea of creating rupiah-denominated digital currency in line with the global trend, but Indonesian stakeholders and observers have told The Jakarta Post that the plan had a long way to go despite the potential benefits.
According to the Bank for International Settlement (BIS), 86 per cent of central banks across the globe are engaging in activities related to central bank digital currency (CBDC), with many still in the experimental stage.
These activities are a response to the rising adoption of cryptocurrencies such as Ethereum, Dogecoin and, the largest by market capitalization, Bitcoin.
While some countries like China and Sweden have seen positive feedback on their CBDC trials, others have fallen short.
Among the latter is Ecuador, which shut down its “Dinero Electrónico” (electronic money) or retail CBDC, just four years after it was launched in 2014 due to low national adoption.
“We are not in a hurry to issue the CBDC, ” BI executive communications director Erwin Haryono told the Post on March 8.
“Because this is such a new thing, [...] we will be very careful and conservative when we implement it later.”
Seeing the mixed results of CBDCs, how might one fare in Indonesia?
What is CBDC?
Central bank digital currency, as indicated in its name, is digital currency that is issued by a country’s central bank and carries the same value and function as banknotes and coins.
“It is like e-money, but issued directly by the central bank, ” Steven Suhadi, who is on the advisory board of the Indonesia Blockchain Association (ABI), told the Post in a phone interview on Monday.
He added that CBDC was different from other digital currencies like Bitcoin, which was a cryptocurrency that used blockchain technology, while no CBDC currently used the technology.
Blockchain technology is basically a database containing permanent data that cannot be changed or altered in any way. In the context of cryptocurrency, it functions as a decentralised and publicly distributed ledger of transactions that could replace many financial functions of a traditional bank.
What we know about Indonesia’s CBDC plan BI governor Perry Warjiyo said on Feb 25 in an online discussion hosted by CNBC Indonesia that it was “working with other central banks and conducting studies” for future creation of the CBDC.
Perry said the central bank would issue wholesale CBDC to financial institutions for businesses-to-business (B2B) transactions and retail CBDC for the public to use in businesses-to-consumer (B2C) transactions.
BI would launch the retail CBDC through financial institutions to minimise disruptions to the banking industry, but it was still undecided on whether the financial institutions would claim these retail transactions through the “indirect method” or if the central bank would through a “hybrid method”.
The difference in these methods determines who handles customer complaints.
Erwin of BI backed up Perry’s statement, saying that commercial banks could lose customers if the central bank launched the retail CBDC directly to end users.
“It will be less disruptive if we [launch] it through the banks. While we have not decided on which method, the discussion is pointing to a design with minimum disruption, ” said the communications director.
He added that the central bank had yet to decide whether to use blockchain technology or not. Erwin said that although blockchain was more secure, the technology available now was not efficient at quickly verifying transactions.
Bitcoin hit its highest price ever when it pushed above US$50,000 in mid-February, a sign that it is gaining popularity among mainstream investors and firms, including American electric carmaker Tesla.
The central bank is looking to issue the Indonesian CBDC in response to increased interest in cryptocurrencies both at home and abroad.
“Since cryptocurrencies issue money just like central banks, why don’t we also issue digital currency?
So CBDCs in Indonesia and elsewhere were created in response to the emergence of cryptocurrencies, ” said Erwin.
Perry also emphasised that, in issuing the CBDC, the central bank would be enforcing the constitutional provision that the rupiah was the one and only Indonesian currency.
More specifically, Article 23B in the Constitution stipulates that the Indonesian currency would be set by law, and the derivative 2011.
Currency Law mandates that almost all financial transactions in Indonesia must be made in rupiah. Exceptions are made for international transactions, government spending and bank savings.
Under Indonesian law, therefore, the buying and selling of cryptocurrencies are only permitted as investments, or legally termed “crypto assets”.
They are not permitted for use as monetary instruments, a function that is exclusive to the rupiah.
Only around 2 per cent of Indonesians had invested in cryptocurrencies, a minuscule figure compared to 30 percent of South Koreans, said the ABI’s Steven.
“But the number of cryptocurrency traders continues to grow in Indonesia, ” he said, and that 13 cryptocurrencies exchanges were registered in the country to date.
According to the Commodity Futures Trading Regulatory Agency (Bappebti), the crypto assets market had grown in the past year as cryptocurrency prices went up.
Last December, the agency issued Bappebti Regulation No. 7/2020 that recognises 229 cryptocurrencies, including Bitcoin, Dogecoin and Ehtereum, as tradable goods on cryptocurrency exchanges.
“However, [CBDC] is different from cryptocurrency. I think that BI cannot anticipate the rise of crypto assets by launching its own digital currency, ” research director Piter Abdullah of the Center of Reform on Economics (CORE) told the Post on Friday.
Piter said CBDC would be more on a par with digital money payment systems, like the e-wallets GoPay and OVO. He added that prohibiting the use of cryptocurrencies and foreign currencies in financial transactions was the “most probable” way of anticipating the growing trend in crypto assets.
What are the benefits of CBDC?
“A big shift that CBDC will have on all Indonesians is taxation. Every transaction will now be traceable and hence, taxable. This should be a huge positive boost to the Indonesian economy," said Steven.
Speaking separately, economist Bhima Yudhistira Adhinegara at the Institute for Development of Economics and Finance (Indef) said that since the central bank could record data on all CBDC transactions, it could use the information to formulate more data-driven regulations.
“The government can better decide how much money needs to be in circulation to prevent inflation, or it can project economic growth with more precisely, ” Bhima told the Post in a phone interview last Friday.
He said that the central bank’s direct monitoring of CBDC transactions could also decrease the circulation of counterfeit money, illegal transactions and criminal activities including corruption, money laundering and terrorism financing.
“If the CBDC also has interoperability, it can become a means of cross-border transactions, which could support our exports, ” Bhima added.
Other potential benefits of issuing CBDC included improving financial inclusion and increasing digital transactions, particular amid the rapid adoption of online payment systems across the archipelago.
How might CBDC fare in Indonesia?
Despite its potential benefits, Bhima said that mass adoption of CBDC would take a long time, as the government needed to synchronise the digital currency with other sectors that used electronic money systems such as e-commerce.
It would also need to build supporting infrastructure and educate the public on digital currencies, especially its rural citizens. He also cautioned that “people are going to opt for” cryptocurrencies if the government still allowed their use in the country.
“This is because cryptocurrencies like Bitcoin have already proven to [generate] high profits.”
Steven was optimistic, however, that blockchain-based CBDCs were a “logical evolution” for central banks within the next 10 years, as the technology had proven that it was possible to provide financial services without intermediaries.
Still, he acceded that digital monetary systems, be they CBDC or fintech, had the potential to disrupt the banking industry by making it easier to move money between traditional financial institutions and digital financial platforms. - The Jakarta Post/Asia News Network
