Bank Indonesia issues White Paper on planned Digital currency

Inflation will return to the target scale of 2%-4% in 2023: Governor

Bank Indonesia issued a white paper on Digital Rupiah’s development on 30 November 2022. The White Paper elaborated on the high-ranking design for Digital Rupiah under the cover of Project Garuda as well as initiated public communication regarding the development plan of Digital Rupiah.

This White Paper explained: (i) Digital Rupiah end-to-end cohesive design configuration, (ii) Digital Rupiah design characteristics that would stimulate new business models, (iii) Digital Rupiah technology architecture, including (iv) regulatory and policy provisions for implementing the Digital Rupiah design.

Contemplating its extensive implications, this national-scale initiative involves synergistic efforts in its formulation and implementation. Correspondingly, the synergy with the international central banking community and international organizations is important to ensure the alignment of the Digital Rupiah design with several interoperability initiatives for cross-border transactions.

The move asserts that many central banks around the world are creating central bank digital currencies (CBDCs), both in the form of retail tokens to be used directly by consumers or wholesale tokens to be used by banks within the fiscal system.

The digital rupiah will emphasize Bank Indonesia’s (BI) position as the sole authority to issue legal tender, involving a digital currency, Governor Perry Warjiyo stated at an event where he also laid out the central bank’s policy guidance for 2023.

Indonesia at present prohibits the use of cryptocurrencies as a means of payment but consents to transactions of digital assets in the commodity futures market for investment purposes.

Digital rupiah will be implemented in stages, starting from wholesale CBDC for issuance, elimination, and transfer between banks, Warjiyo said.

The next stage will be to develop the digital rupiah’s business model for monetary operations and money market, and eventually, a retail CBDC will be established for daily usage, Warijyo said, without clarifying a timeline.

Bank Indonesia said in a report on Wednesday that developing CBDC in Southeast Asia’s biggest economy still needs support from other stakeholders and the central bank must conduct test runs.

According to BI’s data, Indonesia has witnessed double-digit growth in digital banking transactions in the past few years with transactions in 2022 set to increase by 30% to 53,144 trillion rupiahs ($3.38 trillion).

There has also been exponential growth in cryptocurrency investment during the pandemic.

Here are the most recent valuations from Bank Indonesia:

• Global interest rates will tend to stay higher for longer, with the Federal Reserve’s key rate anticipated to achieve 5% and remain high-level for the rest of 2023
• Inflation will return to the target scale of 2%-4% in 2023 and 1.5%-3.5% in 2024
• Credit growth witnessed at 10%-12% in 2023 and 2024

What are CBDCs?

CBDCs are a new form of central bank money that is the liability of the central bank, is denominated in the national official currency, and could serve as a medium of exchange, a unit of account, or a store of value.

The concept to develop Digital Rupiah as the Indonesian CBDC is determined by three key factors:

• The status of Bank Indonesia as the sole institution with the power to issue the Indonesian currency.
• the prolonged effort of Bank Indonesia to strengthen its position on the international stage.
• the necessity to accelerate the integration of the national digital economy and finance.

Built on these key points, the Digital Rupiah design will then be devised to achieve three goals. Firstly, the Digital Rupiah is a digital legal tender for the Republic of Indonesia, adding coins and banknotes. Secondly, Digital Rupiah is a fundamental tool for Bank Indonesia in carrying out its mandate in the digital epoch. Thirdly, the Digital Rupiah as a primary component in supporting the development of national financial systems and the integration of the national digital economy and finance.

The different stages of Digital Rupiah Development

There will be 3 stages of Digital Rupiah development: immediate stage, intermediate stage, and final stage. Each stage will start with public consultations (consultative papers and focus group discussions), followed by technological experimentation (proof of concept, prototyping, and piloting/sandboxing), and conclude with a policy perspective review.