The future of central bank digital currency is here: Jakarta Post contributor

JAKARTA - The future of central banking is at a crossroads. The flow of digital innovation has ostensibly not only disrupted the banking system but also penetrated more broadly the disruption of official currencies and central banking itself, primarily through the emergence of a private digital currency, commonly referred to as crypto-assets and stablecoins.

Technological innovation and changes in public behaviour are the main drivers of these dynamics. New technologies, particularly Web 3.0 and Distributed Ledger Technology (DLT), have further accelerated the massive development of crypto-assets and stablecoins, along with their various inherent opportunities and risks.

On one hand, this phenomenon could potentially increase financial system inclusion and efficiency, including cross-border payments, while establishing a foundation for decentralised finance that offers instant access to a variety of financial products. On the other hand, however, crypto-assets and stablecoins also pose risks associated with money laundering and terrorist financing as well as illegal transactions.

Massive uptake and use of crypto-assets and stablecoins could also impact the effectiveness of the central bank policy, including financial stability risk, shadow currency and shadow central banking, and have implications for the international monetary system at a global level. In response, the international central banking community is certainly not standing idly by.

Various central banks are calibrating their policy approach by starting to explore the subject of issuing a central bank digital currency (CBDC) as a potential future-proof solution.

Echoing this sentiment, under Indonesia’s presidency in 2022, the Group of 20 (G-20) central banks together with international organisations have responded to such dynamics by formulating regulations and increasing oversight of crypto-assets and stablecoins based on the principle of “same activity, same risk, same regulation.”

Notwithstanding, issuing a CBDC is not a simple matter for a central bank. The central bank must formulate and navigate a measured CBDC design that balances the benefits and manages the risks. In terms of CBDC development, a central bank must pay attention to three salient issues.

First, a CBDC design that prioritises the public interest and the duties of the central bank. Development options include retail CBDC that impacts the public directly or wholesale CBDC for interbank transactions and transactions with other financial institutions, which can form the basis for the development of retail CBDC.

Second, the role of the CBDC in terms of supporting financial inclusion through offline features in frontier, outlying and remote (3T) regions, low costs and data granularity. This would complement current payment system digitisation initiatives, including QR standardization and Open API for payments, as well as development of fast payment systems. 

Third, CBDC integration, interoperability and interconnection (3i) with existing and legacy payment systems and financial market infrastructures (FMIs), including cross-border payments.

In that context, Bank Indonesia (BI) is developing the digital rupiah as the Indonesian CBDC inspired by three main drivers. Primarily, the legal mandate that BI is the sole institution authorised to issue rupiah currency in Indonesia, not private parties (shadow currency). Next, BI continues to implement transformation, encompassing the classic function of currency circulation, to deal with the increasingly decentralised digital economy and finance. In addition, BI is preparing cross-border payment infrastructure to cope with international trade and finance in the digital era.

The future is here. BI is exploring the matter of issuing the Indonesian CBDC, or digital rupiah, through an initiative entitled Project Garuda to gauge the appropriate design of the digital rupiah. The digital rupiah is BI’s contribution to the country in the struggle to safeguard rupiah sovereignty in the digital era.

The digital rupiah is expected to offer a future-proof solution. As a form of CBDC development in Indonesia, the digital rupiah provides a way for BI to continue fulfilling its public policy mission in the digital era. With the digital rupiah, the public will gain access to risk-free digital currency denominated in rupiah. On the other hand, the central bank can maintain the best level of public services in the digital era, while bolstering confidence in the rupiah.

The digital rupiah is expected to be more secure in quality and more efficient than physical currency and the balances held at BI. Based on such characteristics, the digital rupiah will effectively become a core instrument for BI to discharge its mandate in the digital era.

BI also places the digital rupiah issuance in the context of strengthening payment resilience among the Indonesian public. The digital rupiah will add to the plethora of payment instruments available to the public that can guarantee transactions under any conditions.

The digital rupiah will complement the currencies commonly used by the public, including physical banknotes and coins. In this case, BI must respond to the payment needs and preferences of the public. Furthermore, digital rupiah development also represents BI’s response to providing rupiah currency that is fast, simple, affordable, secure and reliable within a digital ecosystem.

Project Garuda constitutes an umbrella project for various exploration initiatives concerning the architectural design options of the digital rupiah. This strategic initiative of BI encompasses a series of experimental projects for wholesale and retail digital rupiah. This report is expected to provide guidance and information regarding the high-level design of the digital rupiah, containing the substance of the digital rupiah development plan.

The CBDC design plays an instrumental role in successful implementation. The potential value added for the economy, the ability to bridge central bank implementation of monetary and macroprudential mandates as well as the risks will depend on the design configuration chosen. 

The Group of Central Banks (2021) underlined three foundational principles for consideration by central banks when designing CBDCs, namely: (i) do no harm to monetary and financial stability; (ii) coexist with cash and other types of money in a flexible and innovative payment ecosystem; and (iii) promote broader innovation and efficiency. In that context, formulating the design of digital rupiah faces three main issues.

First, choosing the CBDC architecture. Central banks are faced with a choice between wholesale CBDC (w-CBDC) or retail CBDC (r-CBDC). In general, w-CBDC is more popular in advanced economies where financial markets are deep and the level of financial inclusion is high. Conversely, r-CBDC is generally more popular in developing economies with shallower financial markets and a lower level of financial inclusion. 

Despite guaranteeing direct universal access to trusted money, r-CBDC development is typically more complex than w-CBDC. In addition, central banks are also faced with the issue of choosing an architecture that supports the interoperability of cross-border transactions.

Second, CBDC’s contribution to financial inclusion, if designed properly, CBDC, r-CBDC in particular, will increase financial inclusion, for example through offline functionality and the use of granular data. In principle, however, financial inclusion is a public mission that must be actively encouraged.

Financial inclusion should not wait for or depend on CBDC issuance. In the case of Indonesia, for example, financial inclusion is increasing through digitalization of the payment system and services in accordance with the Indonesia Payment System Blueprint (BSPI) 2025, including QRIS, SNAP and BI-FAST. The digital rupiah, therefore, will complement such existing initiatives.

Third, in ensuring CBDC integration, interoperability and interconnection (3i) with financial market infrastructures (FMIs), including in the context of cross-border payments, the CBDC platform must coexist with existing financial market infrastructures to provide an efficient and integrated solution. THE JAKARTA POST/ASIA NEWS NETWORK