Digital currency has become a trend in our society today. The existence of cryptocurrencies such as Bitcoin and Libra has challenged our financial system. As a result, the Central Bank as the government body who is responsible for conducting the monetary system is developing techniques to catch up with the trend itself so that it would not lose its authority over the financial system in a country. This is important because the shortcomings that come from cryptocurrencies have turned the world to another revolution of money. Thus, to understand more about the trend, it is important for us to begin our understanding about what is digital currency itself.
Digital currency – otherwise called digital money, electronic money, electronic currency or cyber cash – is a term used to include the meta-group of sub-types of digital currencies, including virtual currency, cryptocurrency, e-Cash, and Central Bank Digital Currency (Tan, 2020). Hence, digital currency is an electronic form of money.
What makes the difference between digital currency and the existing e-money such as DANA pay or OVO is that this currency has no physical form. Using the current e-wallet, people can easily change their account to physical Rupiah. However, in the case of digital currency, it can only be accessed through smartphones or other telecommuting devices but cannot be exchanged for cash (Rodeck, 2021).
The Bank of England have described a CBDC as electronic central bank (CB) money that:
1. Can be accessed more broadly than reserves;
2. Potentially has much greater functionality for retail transactions than cash;
3. Has a separate operational structure to other forms of Central Bank money, allowing it to potentially serve a different core purpose, and;
4. Can be interest bearing, under realistic assumptions paying at a rate that would be different to the rate on reserves. (Ward & Rochemont, 2019).
Some people might be confused in understanding the difference of central bank digital currency and private cryptocurrencies such as Bitcoin, Libra, and Ether. It is important to note that digital currency is a very wide range, hence, cryptocurrency is one of its kind. Cryptocurrency itself is a digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer funds, operating independently (Ward & Rochemont, 2019). Hence, even other currencies could borrow cryptocurrency technology as the medium to make their digital currency. What makes CBDC different with other private currency is perhaps the way they are issued. CBDC is a currency that is issued by the Central Bank whereas private cryptocurrency is issued by firms.
Furthermore, who issued the money would become the most vital matter as it determined the legality of the money itself. For example, the use of Bitcoin can only be used at merchants who accept those payments. Indeed, private cryptocurrency would be like the community currency such as dinar and dirham community. As for CBDC, once they are issued, they could be used nationally and globally because it has been legalized by the government.
In addition, the main reason for the issuance of private cryptocurrency is that it is based on a decentralized system that makes it hard for any government intervention. Our financial systems today mostly rely on the centralization where bank central has the authority to overview any transactions within the country to prevent any money laundering and other crimes. It also helps the Bank Central to keep stability of a nation’s monetary system. The willingness of people to be free from government intervention is one of the reasons that people start to use private cryptocurrency. This would open more opportunities for crimes to happen such as money laundering and corruption by government employees. As for this matter, it is a challenge for the Central Bank to prevent this risk from happening in the future. Hence, it is believed that CBDC can be a solution to keep control of the monetary system and make it balance as the impact of the widespread use of private cryptocurrency.
China has become one of the pioneers in implementing Central Bank Digital Currency. There are the needs for both domestically and internationally, also politics and economically towards the implementation of digital Yuan. Some of the domestic reasons why China issued digital yuan is to increase financial inclusion and as prevention of financial crime (money laundering, terrorist financing, and tax evasion) (Randhawa, 2020). As the country with the biggest population in the world, a large population in China, especially those in rural areas do not have access to banks. The issuance of digital yuan would help better financial inclusion for this population since CBDC is not limited for bank account holders.
Besides, in China, cash is reportedly used in many suspicious transfers of money. China’s cash in circulation of money at the end of 2019 was 7.7 trillion yuan, a 5.4% increase year on year, which means the absolute amount is on the rise even though a percentage of cash in circulation to nominal GDP declined to 7.8%. In addition to more stringent monitoring of large cash transactions, China promotes CBDC so that the government could have a better view on its money circulation as to strengthen countermeasures against crime, including illicit outflows of funds (Yatsui, 2020).
Furthermore, China Digital Currency Electronic Payment (DCEP) is a method to prevent the existence of an oligopoly market in digital payment by big private companies (Yatsui, 2020). Study shows that in terms of value, banks outperform non-banks in e-payments transactions because it handles large corporate payments, remittances, and payroll payments. However, in terms of volume, the non-banks far surpass the banks due to the rapid growth of small mobile payments. Of the total mobile payments, Alipay accounts for 55.4%, and Tencent affiliates, including WeChat Pay, for 38.5%. The oligopoly made by these two giant companies could lead to a situation where safety of payments is lost. In short, China DCEP would be a net to keep the use of digital payment in control.
People Bank of China (PBoC) has begun exploring the concept of a national virtual currency in 2014. Next, they include the application of blockchain technology in its 13th Five Year Plan in 2016. Subsequently, the PBoC established Digital Currency Research Institute in 2017, which is responsible for China’s digital currency development and testing to further its efforts in the development of the “Digital Yuan”. With the Coronavirus pandemic, it catalyzed the process of digitalization of Yuan. In April 2020, the PBoC confirmed that some state-owned banks are conducting internal trials of the digital currencies in four Chinese cities – Shenzhen, Suzhou, Chengdu, and Xiong’an – and is considering its usage during the 2022 Winter Olympics in Beijing.
China has also included some big merchants for testing DCEP. These include Starbucks, McDonald’s, and other major firms such as ride-hailing company Didi Chuxing, food delivery giant Meituan Dianping and streaming platform Bilibili. Those merchants are chosen because it can be explained by fact that they make transactions worth several billion dollars daily. For example, Didi Chuxing (ride hailing service) has a client base of about 550 million while Meituan Dianping (food delivery services) currently has almost 450 million customers and about 6 million companies using it to sell their products. Such volumes can significantly accelerate the popularity and subsequent adoption of the digital yuan (Tan, 2020).
The goal of China’s pilot program on CBDC is to test for the digital currency’s theoretical reliability, system stability, functional availability, process convenience, scenario applicability and risk management. Even though it is said that digital RMB is the unifying feature of the dual circulation economy by seamlessly linking both domestic and external components so they are safe from foreign interference, how long the testing period would be is still unknown. The adoption of digital currency is still a long journey for China and other central banks around the world.
As a leading country in implementing digital currency, there are many things that Indonesia could learn from China. This is with the background that Indonesia and China both have similarity in terms of its population of citizens and also the culture as Asian country. Some lessons that can be learned from China CBDC development are:
Firstly, a country must be advanced in technological development. The collaboration of government and researchers and technology experts will determine the success of the implementation of CBDC in most countries not limited to China. Indonesia could follow by establishing a research center under Bank Indonesia to explore the possibility of implementing CBDC in Indonesia. However, looking at the possibilities must also be backed up by the advancement of technology development. Some other fields that need to be encouraged to boost the research are experts in cryptocurrency, blockchain technology, cyber security and other technology that are related to them. China has done this earlier since 2014 by exploring national digital currency and finally established the Digital Currency Research Institute in 2017. In short, getting loads of research is crucial to implement the national digital currency and should be done immediately if Indonesia will follow other countries soon.
Secondly, implementing CBDC should be backed by the strong political policy in the country. Implementing CBDC will be such a breakthrough in our economy system. Hence, the involvement of government policy might be needed in order to make it develop smoothly. This is because the digital currency issued will be implemented both in national and international scope. As per today, most digital currencies are backed with each country’s currency because the US dollar has not issued their digital currency yet. As a result, there has to be a strong economy to back up their currency. China is able to have such an achievement because Yuan is a currency that is also used widely. Furthermore, it is also one of the currencies in international trade. This make the Chinese Yuan is able to stand independently to the US dollar. Hence, if Rupiah can be strengthened, then it could add up to make the release of Rupiah CBDC possible.
Lastly, in order for CBDC to run effectively, it needs collaboration from all both government and private firms especially in the time of its trial. All local firms should support the initiation of government in issuing CBDC by willing to try it as their method of payment. The involvement of big companies in the trial program will be good because it could help researchers a lot to know how CBDC will impact the economy faster. As it is done in China with some of its big corporates, Indonesia should also look forward to synergizing with other big companies in Indonesia. This is because the big amount of transactions that is done by big companies can be a factor to be observed by the researchers.
As it is reported by Bank Indonesia, Indonesia is not in a hurry to issue its CBDC (Bank Indonesia, n.d.). However, Indonesia is still in the phase of observing everything. Both possibilities and threats are considered to make sure that Indonesia has a strong framework that is based on good design and technology before it implements its CBDC. Learning from China digital Yuan, cybersecurity and infrastructure is something that still needs to be upgraded before Indonesia goes to the next phase in issuing its CBDC. This is because, in an archipelago country such as Indonesia, the access to internet for all regions is still minimum and it could be a point that could be taken for consideration while building the system. Currently CBDC is included as a way to implement Blueprint Sistem Pembayaran Indonesia 2025 (Indonesia Payment System Blueprint 2025) (Bank Indonesia, n.d.).
A report by Institute and Faculty of Actuaries mentioned that one of potential risks in issuance of CBDC is that there would be greater competition among commercial banks which in turn lowers the profitability and reduces the financial stability of commercial banks, especially in the economic downturn (Ward & Rochemont, 2019). To maintain the healthiness of the private banking sector and also for the economy of the nation as a whole, Indonesia should review the role of commercial banks in its economic system and design a CBDC framework that could benefit both the government and also the private banking sectors.
In conclusion, the rise of private cryptocurrency that is issued outside the central bank has become one of the most influential phenomena in shaping our economic system. The authority of central banks across the world has been challenged. Hence, in recent international monetary policy conferences the idea of Central Bank Digital Currency is introduced.
Indonesia, which intends to digitize its money, can learn from other countries before starting to develop its own digital currency. The advancement in technology, strong economic policy, and the collaboration between government and firms are three things that China has done in issuing its CBDC and become the pioneer in the field. Those three aspects, if taken as the base of building a CBDC, could also bring Indonesia successful in issuing Digital Rupiah.
Works Cited
Bank Indonesia. (n.d.). Rupiah Digital/ Central Bank Digital Currency (CBDC). From https://bicara.bi.go.id/knowledgebase/article/KA-01038/en-us
Randhawa, D. S. (2020). China’s Central Bank Digital Currency – Implications for ASEAN. Singapore: S Rajaratnam School of International Studies (RSiS)-Nanyang Technological University.
Rodeck, D. (2021, April 1). Digital Currency: The Future of Your Money. From Forbes Advisor: https://www.forbes.com/advisor/investing/digital-currency/
Tan, J. (2020). Digital Currency – Lessons from China. The Future: Digital Currency, 3.
Ward, O., & Rochemont, S. (2019). Understanding Central Bank Digital Currency (CBDC). A Cashless Society-Benefits, Risks and Issues (Interim Paper) (p. 8). UK: Institute and Faculty of Actuaries.
Yatsui, T. (2020). Implications of China ‘s Digital Yuan Initiative – Potential Impact and Future Focal Points -. Mitsui & Co.
Author : Mutya Qurratu'ayuni Mustafa
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