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Bank of Indonesia wants digital currency to benefit real economy

The Bank of Indonesia is exploring central bank digital currency (CBDC) as legal tender because it wants digital currency to benefit the real sector of the economy and not just become a financial asset for the benefit of the few.

Cryptocurrency investments in Indonesia topped IDR 478 billion ($ 33 ​​billion) in the first seven months of 2021, multiplying the IDR 65 billion by seven in all of 2020, but the country does not recognize cryptocurrencies as legal tender.

The country’s central bank views cryptocurrencies as investment vehicles with no underlying assets and has warned investors to be vigilant against the instrument’s high volatility.

“Digitization must improve economic and not just financial productivity [investment] like crypto. This must have a significant impact on the real sector ”, Juda Agung, assistant to the governor of the central bank, noted during a session of Parliament.

Digital rupee

The majority of central banks around the world are studying the feasibility of adopting CBDC in their financial systems and some have started to pilot implementation in the near future. In Asia, Cambodia introduced its CBDC – the Bakong – as the country wants to break out of its dependence on the US dollar.

The world’s second-largest economy, China, is testing its digital yuan in major cities such as Shenzhen, Beijing and Shanghai, and could unveil it to an international audience during the upcoming 2022 Winter Olympics in Beijing.

For its part, Bank Indonesia aspires to create the digital rupee to enable a cheaper and faster settlement process.

“The CBDC is needed against a backdrop of rapidly increasing digital transactions. We must ensure that the CBDC can maintain the effectiveness of monetary policy, the stability of the financial system and financial inclusion, ”said Judah, a career central banker with more than three decades of experience.

Bank Indonesia is moving cautiously

A person familiar with the thinking of Bank Indonesia told Capital.com that the central bank is moving cautiously on the CBDC because best practices for such a currency have yet to be found. But the need to quickly adapt to new technology has accelerated the regulator to accelerate improvements to the existing payment system.

“BI [Bank Indonesia] is still at an early stage in the design of CBDC, with various studies from other countries. For now, the central bank is focused on improving its infrastructure such as interoperability between banks and fintechs, improving real-time gross settlement, and cross-border digital payments with countries like Malaysia and the United Kingdom. Thailand, ”the person said.

The person added that no fixed timetable has been set for the adoption of the digital rupee.

David Sumual, chief economist at Bank Central Asia – Indonesia’s largest private lender – also estimated that the digital rupee will need “several years” to develop.

“Bank Indonesia is still in the feasibility study phase of CBDC. IT investments for the CBDC won’t be cheap and their priorities are to improve the existing payment infrastructure, ”David told Capital.com.

Regulatory reforms needed

Besides the IT infrastructure, Indonesia needs to revise several regulations to allow digital currency in the country.

For example, since cryptocurrency is considered a commodity, it is overseen by the Commodity Futures Trade Regulatory Agency of the Ministry of Commerce (known locally as BAPPEBTI), which does not have the mandate to supervise the financial system at large.

“Crypto is currently under the [supervision] by BAPPEBTI. We have to revisit this because the involvement of crypto in the financial system is quite large, ”Judah said.

Other regulations that require changes include the Currency Law, as it currently does not recognize digital currency, added Judah.

Haram or halal speech

As cryptocurrency regulations are not well established, Muslim clerics across the country are trying to provide better indications of the instrument’s growing popularity – the Commerce Ministry said 7.4 million Indonesians have invested in crypto assets in July, up from four million at the end of 2020.

Recently, the Indonesian Ulema Council (known locally as MUI) ruled that the cryptocurrency was legal tender. haram – not allowed by Islamic laws – because legal tender due to unclear underlying assets and enormous volatility carries elements of uncertainty and excessive speculation.

The Ulema Council will submit its views on crypto assets to the National Sharia Council, which has the power to wipe out Sharia-compliant investment instruments.

Meanwhile, the Wahid Foundation, founded by the daughter of prominent Muslim cleric and Indonesian fourth president Abdurrahman Wahid, released a more lenient view on crypto investments, as crypto assets can be treated as a form of commodity, although it is agreed that it cannot be used as legal tender.

CBDC Ends Haram-Halal Dilemma

The mixed views among local Muslim scholars have put some members of the public in a dilemma and having officially established a digital currency and clearer regulations will provide clear boundaries.

“Bank Indonesia’s position has been very clear. We ban crypto as a form of payment, ”said Judah, adding that globally the use of cryptocurrencies is primarily for investments and not for transactions.

“The CBDC can be part of our efforts to counter the use (of) cryptocurrency in the financial system. The public will have more confidence in the credibility of the CBDC, ”he said.

Read more: The digital yuan will not promote the internationalization of the RMB

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