In the Draft Law on the Financial Sector Development and Strengthening or the P2SK Bill, there is an article that regulates the existence of digital money.
The article is an addition to Law Number 7 of 2011 concerning currency, which does not yet accommodate the existence of digital money.
It is stated that the medium of exchange consists of paper, metal and digital rupiah. Thus, Bank Indonesia (BI) will be able to launch digital money or Central Bank Digital Currency (CBDC), something which has received wide attention from almost all central banks around the world.
The urgency of issuing digital rupiah has been debated amid many other issues.
So far, only two countries have launched CBDCs, namely the Bahamas with Sand Dollars and Jamaica with Jam-Dex. Several countries have entered the experimental phase, such as Nigeria (e-Naira), China (e-CNY) and Sweden (E-krona). As of July 2022, 15 central banks have conducted trials, 15 others are in the proof of concept phase, and 65 more, including Indonesia, are still in the research phase.
The urgency of issuing digital rupiah has been debated amid many other issues. One of them is the problem of dependence on foreign liquidity caused by the shallowness of the domestic financial market.
As a result, the rupiah tends to be unstable. Last week, BI again raised the benchmark interest rate or what is known as the BI 7-Day Reverse Repo Rate (BI7DRR) by 50 basis points (bps) to 4.75 percent. This progressive policy was taken mainly to anticipate the weakening of the rupiah, which at the end of last week weakened to Rp 15,600 per US dollar.
The urgency of issuing CBDCs is inextricably related to the increasing popularity of anonymous cryptocurrencies, resulting in very high volatility. So far, crypto money is difficult to use as a currency because it does not meet the requirements as a unit of account, a store of value and a medium of exchange.
Realizing this shortcoming, many parties are developing stablecoins or cryptocurrencies that are issued by official institutions, such as Apple, Facebook and other digital companies
Lately, the crypto world has declined very sharply, about 60 percent from last year; this phenomenon is called “crypto winter". Realizing this shortcoming, many parties are developing stablecoins or cryptocurrencies that are issued by official institutions, such as Apple, Facebook and other digital companies or linked to conventional currencies (fiat money). That way, the value is more stable.
Even if they are more stable in value, stablecoins cannot be widely recognized because they are fragmented. It is difficult to use as a currency on a large scale. Therefore, digital money issued by the central bank is a solution. The presence of CBDC is important amid a surge in interest in crypto money or assets.
Focus on stability
In Indonesia, investors in crypto assets number 15 million, far exceeding investors in the capital market and debt market. CBDC is an alternative to the use of cryptocurrencies that are difficult to contain in the later Metaverse-era. In the future, dependence on cryptocurrencies will increase, creating shadow banking that has the potential to cause instability.
Although not in the near future, CBDC will be needed so that infrastructure should be prepared, both regulations and technology. The urgency of CBDC will be different in each country so it is necessary to define the exact scope of its needs.
Sveriges Riksbank of Sweden, for example, is planning a full migration to CBDCs. As one of the oldest central banks in the world, founded in 1668, the Swedish Central Bank will serve around 10 million people with a per capita income level of over US$60,000. In addition, the level of financial and technological literacy is also quite good, so they are ready to use E-krona fully.
The situation is, of course, very different from ours. However, the provisions regarding digital money in the P2SK Bill are very helpful, if one day it should be needed. Normatively, the implementation of CBDC can increase transparency, accessibility that encourages financial depth and speed of monetary operations that supports financial-system stability. In other words, digital money can be part of the solution to various structural problems in our financial sector.
However, there are other articles that need attention in this P2SK Bill. First, regarding the disappearance of the article that regulates the independence of BI from political intervention. It is possible that the omission of this article assumes that politically affiliated parties cannot automatically be nominated as governors and members of the Board of Governors. Similarly, the chairman of the Board of Commissioners of the Financial Services Authority (OJK) and the Deposit Insurance Corporation, whose leadership requirements are not specifically regulated, must be free from political affiliation.
However, ambiguity immediately arises because the requirements for the OJK Supervisory Board or the Banking Supervision Board are explicitly stated to prohibit parties with political affiliations. If the prohibition were not written for the positions, both the Board of Commissioners and the Board of Governors, it could be interpreted as possible. To ensure the independence of the central bank, a clear article is needed.
Second, related to changes in the duties of BI. As stipulated in Law No. 23/1999, BI’s objective is to achieve and maintain stability in the value of the rupiah. In the draft omnibus law for the Financial Sector, BI's objectives are to maintain rupiah stability and payment system stability, and contribute to financial system stability in order to support sustainable economic growth.
The formulation of BI's objectives is confusing. In this formulation there are two main tasks of BI, namely maintaining the stability of the rupiah value and maintaining the stability of the payment system. An additional task is to contribute to maintaining financial system stability by specifying the context, namely in the context of supporting sustainable economic growth.
Why should the stability aspect of the payment system be explicitly written? Is it because the scope of BI's current policy is only on the payment system with the establishment of the OJK? If so, the mention actually downgrades BI's role.
If with the sole purpose of BI being considered alienated from the complexities of economic problems, assigning various tasks to BI is also ineffective, if not unrealistic. Each goal requires a set of policies that may conflict with each other in their implementation.
The middle way is to expand the tasks of BI to participate in maintaining financial system stability, in addition to the main task of maintaining the stability of the rupiah. The stability of the exchange rate and financial system is the main foundation of all dynamics and sustainable economic development.
Rector of Atma Jaya Catholic University.
This article was translated by Hendarsyah Tarmizi.