Bank Indonesia is preparing a central bank digital currency, or CBDC, governor Perry Warjiyo announced last week. In a post on Instagram, the bank said it is conducting research and assessments for its CBDC as a facet of its sovereign currency. The central bank’s move demonstrates that Indonesia’s financial authorities are laying the foundations for more advanced financial innovations at a time when people in the country are comfortable with making cashless transactions.
The central bank indicated three considerations in its Instagram post: the digital currency will serve as a legal payment instrument, it will be tech-based, and it will support the bank in its policies, including the control of money supply.
This new development will take time, Bank Indonesia said, as the CBDC will require investments in infrastructure like cybersecurity measures. Bank Indonesia is conducting an assessment to further understand the benefits of and potential for its CBDC, involving areas like design, technology, and risk mitigation. It is in close contact with other central banks to review progress on the matter.
Central banks around the world are studying or testing the implementation of CBDCs. China pioneered the research in 2014 and made history last year when it began testing its digital yuan in trial programs that cost millions of dollars per run. 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 the digital rupiah is still not clear, and there are many unanswered questions, such as what is the mechanism of its creation and circulation, what technology will be used, and how the bank will distribute the money to consumers,” Abdullah told KrASIA. Fintech firms and banks can already digitize banknotes, he pointed out, but a digital currency is much more complex. “The regulator needs to map out the concept, procedure, and purpose before starting to build the infrastructure. It could take years.”
By definition, decentralized cryptocurrencies, like Bitcoin and Ethereum, wrest some control over the money supply and payment systems from conventional financial institutions, particularly central banks, if they become broadly adopted. Although crypto is not a formal means of payment in Indonesia, more people are stashing money in crypto and treating it as an investment or asset class. There are currently 4.45 million crypto investors in the country, exceeding the estimated 2 million investors who are active in the conventional stock market as of February 2021.
“CBDC is a response from the central bank to the rise of cryptocurrencies,” said Abdullah. “It is not a crypto competitor because they have different principles.” While cold, hard cash—and its digital equivalent in Indonesia’s CBDC—is issued by the central bank, cryptocurrencies are created via a decentralized network of computers using blockchain technology.
CBDCs bring various benefits. The digital rupiah would be less costly to create, distribute, and safeguard than banknotes and coins. It could even complement the bank’s monetary policy, as real-time monitoring of digital cash flows could provide insights into macroeconomic conditions. Moreover, one frequent talking point is that CBDCs will limit or even eliminate money laundering and payment fraud.
Bank Indonesia’s plan is the latest response from regulators reacting to the rapid development in the country’s technology sector. Indonesia’s financial authority OJK and the stock exchange, IDX, are currently reviewing new policies to accommodate tech companies like GoTo and Bukalapak, which reportedly plan to go public this year.
IDX has consistently encouraged tech giants to commit to IPOs in Indonesia. In January, the bourse launched a new sectoral classification system, called IDX Industrial Classification, which is meant to provide metrics for institutional investors to conduct detailed financial analyses. Although the exchange requires a company to be profitable for at least a year to list on the Main Board, it is now framing new rules for loss-making tech giants. Instead of using their profitability as the only gauge, the bourse may also take into account these companies’ net tangible assets, market cap, or cumulative operating cash flow.
The new tech stocks will likely attract new retail investors, especially millennials or Gen Z, who have observed the stellar performance of tech stocks in the United States or other markets. “Young investors are more interested in crypto today despite its high volatility,” said Abdullah. “But I believe tech stocks have big potential as well. For instance, since Gojek made an investment in Bank Jago, its stock has continued to rise, showing a high interest in tech companies.”
Tech innovations in the financial and banking industry are changing the way consumers and businesses save and invest their money. However, the full potential of CBDC will only be realized when citizens have equal 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 ways to go, such as building infrastructure evenly and educating people about finance and technology,” Abdullah added.