In Dynamic Financial Landscape, Indonesia Has Plans Regarding Digital Rupiah

Bank Indonesia is preparing a central bank digital currency, or CBDC, as announced by Governor Perry Warjiyo last week. In a post on Instagram, the central bank revealed that it is conducting research and assessment for CBDC as an aspect of the country's currency. The central bank's move shows that Indonesia's financial authorities are laying the groundwork for more advanced financial innovations when people in this country are comfortable doing cashless transactions.

The central bank indicated three considerations in its Instagram post: the digital currency would serve as legal tender, it would be technology-based, and it would support the bank in its policies, including control of the money supply.

This development will take time, said Bank Indonesia, as CBDCs will require investment in infrastructure such as cybersecurity measures. Bank Indonesia is conducting an assessment to better understand the benefits and potential of its CBDC, covering areas such as design, technology, and risk mitigation. It is closely liaising with other central banks to review progress on this issue.

Central banks around the world are studying or testing CBDC implementations. China spearheaded the research in 2014 and made history last year when it began testing its digital yuan in a pilot program that costs millions of dollars per round. Indonesia may need time to make significant progress, said Piter Abdullah, a former senior economist at Bank Indonesia and now research director at the Center of Reform on Economics Indonesia.

"The concept of digital rupiah currency is still not clear, and there are still many unanswered questions, such as how the mechanism of manufacture and circulation is, what technology will be used, and how banks will channel the money to consumers," Abdullah told KrASIA. Fintech companies and banks can already digitize paper money, he said, but digital currencies are much more complex. “Regulators need to map out concepts, procedures, and goals before starting to build infrastructure. It could take years.”

By definition, decentralized cryptocurrencies, such as Bitcoin and Ethereum, wrest control of money supply and payment systems from conventional financial institutions, especially central banks, if widely adopted. Although crypto is not a formal means of payment in Indonesia, more and more people keep money in crypto and treat it as an investment class or asset. There are currently 4,45 million crypto investors in the country, exceeding the estimated 2 million investors active in the conventional stock market in February 2021.

“CBDC is a response from central banks to the rise of cryptocurrencies,” Abdullah said. “These are not crypto competitors because they have different principles.” Temporary cold, hard cash—and its digital equivalent at CBDC Indonesia—is issued by a central bank, cryptocurrencies are created through a decentralized computer network using blockchain technology.

CBDC brings various benefits. Digital rupiah will be cheaper to create, distribute, and maintain than paper money and coins. It can even complement a bank's monetary policy, as real-time digital cash flow monitoring can provide insight into macroeconomic conditions. In addition, one thing that is often talked about is that the CBDC will limit or even eliminate money laundering and payment fraud.

The Bank Indonesia plan is the latest response from the regulator in responding to the rapid development of the country's technology sector. The Indonesian financial authority OJK and the Stock Exchange, IDX, are currently reviewing new policies to accommodate technology companies such as GoTo and Bukalapak, which reportedly plan to go public This year.

IDX consistently encourages technology giants to commit to IPOs in Indonesia. In January, the stock launched a new sectoral classification system, called the IDX Industry Classification, which is intended to provide metrics for institutional investors to conduct detailed financial analysis. While the exchange requires companies to earn profits for at least one year to be listed on the Main Board, this sets up a new set of rules for the losing tech giants. Instead of using their profitability as the sole measure, exchanges can also take into account the net tangible assets, market capitalization, or cumulative operating cash flows of these companies.

New tech stocks are likely to attract new retail investors, especially millennials or Gen Z, who have been watching the performance of tech stocks in the United States or other markets. “Today, young investors are more interested in crypto despite its high volatility,” said Abdullah. “But I believe technology stocks also have great potential. For example, since Gojek made an investment in Bank Jago, its shares continue to increase, showing high interest in technology companies.”

Technological innovations in the finance and banking industries are changing the way consumers and businesses save and invest their money. However, the full potential of CBDCs will only be realized when citizens have inclusive access to the internet as well as financial and digital literacy.

“The government strongly supports digitalization in the financial industry to provide access for more people. However, we still have a way, such as building infrastructure evenly and educating the public about finance and technology," Abdullah added.

-This article was first released by KRASIA. Re-released in Indonesian as part of the collaboration with DailySocial