The purpose of the issuance of the digital rupiah needs to be clarified so that the design and implementation is more accurate and the benchmarks of its success should also be clearly defined.
By
RICO USTHAVIA FRANS
·6 minutes read
Electronic payments using credit cards, debit cards, electronic money or savings debits are quite common nowadays. The shift of the lifestyle to online transactions and support for online or offline payment infrastructure using QRIS has driven the rapid adoption of electronic payments. Nevertheless, the use of currency is still growing.
Even though the crypto world is currently experiencing a "winter," there is the perception of crypto coins as a means of payment for buying crypto assets or as the main payment instrument on the Web 3 platform.
It leads to “cryptoization,” namely the development of crypto coins as a means of payment that can replace official money.
The above phenomena not only have the potential to create shadow banking, but also shadow currency and shadow central banking. This is what happened in China where AliPay and WeChat Pay dominate 90 percent of retail payment transactions with transaction values reaching 10.8 trillion yuan or the equivalent of US$1.7 trillion.
Anticipating this, the central banking community around the world is exploring the issuance of the Central Bank Digital Currency (CBDC). About 60 percent of central banks are experimenting, while two central banks, namely the Bahamas and Jamaica, have already issued CBDCs.
In November 2022, Bank Indonesia (BI) also published the Garuda Project white paper, BI’s first step in issuing the digital rupiah as an Indonesian CBDC. As a CBDC, the digital rupiah is different from savings or electronic money. Savings and electronic money are liabilities of commercial banks or electronic money issuers. If they go bankrupt, our money has the potential to vanish. Although relatively small, there is credit risk borne by the customers.
The digital rupiah is an official claim against the state for those who own it. The state, through BI, is the guarantor. This makes the digital rupiah a relatively credit risk-free instrument even though in theory the state can also default on payments.
The Garuda Project white paper provides a basic overview of BI's vision and thoughts regarding the digital rupiah. The issuance of the CBDC is a complex project and needs to be well planned.
Initial thought
Without intending to be patronizing, here are some aspects of thought that might be useful so that the issuance of the digital rupiah will not interfere with the implementation of BI's mandate in the monetary and macroprudential fields. Apart from that, the digital rupiah should also be able to coexist with existing currencies and encourage innovation and efficiency.
First, the purpose of the issuance of the digital rupiah needs to be clarified so that the design and implementation is more accurate and the benchmarks of its success should also be clearly defined. If the goal is to promote financial inclusion and efficiency of the payment system, it can still be achieved with existing payment instruments and electronic money. The implementation of QRIS has become a game changer with the availability of tens of millions of domestic and cross-country merchants that can accept electronic payments.
If BI's goals are similar to those of the European Central Bank, which plans to use the digital euro to deal with anti-money laundering, terrorism financing and user privacy issues, they can still be achieved by improving electronic know your customer (e-KYC) and anti-money laundering processes and prevention of terrorism financing in banks and electronic money issuers.
If the aim is to reduce the dominance of crypto coins, it is necessary to think about how the digital rupiah can be accepted on the Web 3 platform, which philosophically respects decentralization of authority. Technically, it is necessary to ensure that aspects of integration, interoperability and interconnection (3i) are designed with open technology in a global context, not just domestic.
The second aspect is institutional and role setting. Will existing electronic money issuers still be able to issue their own electronic money or can they only circulate the digital rupiah as wholesalers and retailers?
The classic problem of referees who also act as players must also be anticipated. To what extent will BI compete with electronic money issuers? How can BI continue to carry out the role of regulator wisely? This must be considered in depth by inviting banks and electronic money issuers to have an open dialogue.
The third aspect is the commercial aspect. Card-based electronic money is growing fast when it is required to pay tolls and other public transportation. Server-based electronic money is growing rapidly because it is used in digital ecosystems that are generally owned by business groups. Aggressive promotion is also very helpful.
Will a similar strategy be carried out by BI to encourage the use of the digital rupiah? Or are the wholesalers and retailers expected to perform this role? Is the value proposition “safe state electronic money” sufficient to encourage the use of the digital rupiah?
The fourth aspect is the use of the digital rupiah as a monetary instrument. Will the digital rupiah be used only as a means of payment or will it be used as a monetary instrument actively? Is the digital rupiah inflationary in which the government can print the digital rupiah as needed or is it deflationary like Bitcoin, which is limited by the total value that can be issued? Will the digital rupiah be given interest? Technically, the digital rupiah can even be given negative interest.
Will a similar strategy be carried out by BI to encourage the use of the digital rupiah?
The fifth aspect is the aspect of technology and privacy. To what extent will digital rupiah use Distributed Ledger Technology or blockchain. Will the use of permission-based blockchain be able to handle high transaction volume and frequency, especially during the digital rupiah phase for retail? When will the account concept that requires e-KYC principles be applied? When can the concept of a token as a bearer instrument be used?
The next aspect is the risk factor. One of the risks identified in the white paper is the procyclical impact, which risks amplifying bank runs during a crisis because people can transfer funds from banks massively and easily convert them into the digital rupiah. In addition, it is necessary to examine more deeply the operational, legal and other systemic risks.
RICO USTHAVIA FRANS, member of the Steering Committee of Indonesia Fintech Society (IFSOC)
This article was translated by Hendarsyah Tarmizi.