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Indonesian Central Bank explores CBDC to ‘future proof' monetary policy

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(Kitco News) - Bank Indonesia (BI), the central bank for the fourth most populous country in the world, released a white paper on Thursday which outlines their approach to a possible central bank digital currency (CBDC).

“The future of the central bank is at a crossroads,” wrote BI Governor Perry Warjiyo. “Digital innovations may not only disrupt the banking system, but on a more pervasive scale, the possible disruptions on official currencies and central banking triggered by the advent of stablecoins and unbacked crypto assets.”

The report notes that blockchain technologies and cryptocurrencies have “the potential to increase financial inclusion and improve the efficiency of the financial system, including cross-border payments, and to lay foundations for decentralized finance that offers instant access to various financial products.”

It also warned that stablecoins and unbacked crypto assets could in increase the risk of money laundering and terrorism financing as well as “macrofinancial risk in the form of shadow currency and shadow banking that undermine the effectiveness of central bank policy.”

The report notes that some experts believe these assets could establish “a Digital Currency Area” that disregards central banks and exerts pressure on the international monetary system on a global scale. “Needless to say, central banking community will not just sit it out and do nothing. Nor will BI.”

Warjiyo writes that central banks view CBDCs as “a prospective future-proof solution,” but that the issuance of a CBDC will not be easy.

He outlines three key areas that BI will consider as they explore a possible ‘digital rupiah:’ The design, which needs to take into account the public interest and central bank roles, including the choice between retail and wholesale CBDCs; its role in supporting financial inclusion, especially for Emerging Markets and Developing Economies (EMDE) through features like offline functionality and low transaction cost, among others; and the CBDC’s ability to meet interconnectivity, interoperability, and integration (3i) aspects with existing payment systems, including cross-border contexts .

“In this regard, Bank Indonesia will develop CBDC as inspired by three key drivers,” he writes. “Firstly, Bank Indonesia will be the sole institution with legal privilege to issue Rupiah currency in Indonesia as mandated by the law. Secondly, the need to continuously promote digital transformation agenda which includes the conduct of Bank Indonesia’s classic function in money circulation amidst the wave of decentralization in digital economy and finance. Thirdly, the need to arrange infrastructures for cross border payment to enable trade and international finance in digital era.”

The central bank’s CBDC initiative is called ‘Project Garuda’ and it plans for the creation of both wholesale (w-Digital Rupiah) and retail (r-Digital Rupiah) versions.

BI envisages a process with three phases. During the current phase, experimentation and use cases for issuance, redemption, and transference of w-Digital Rupiah will be done. In the intermediate phase, w-Digital Rupiah use cases will be expanded to include more diverse financial market transactions. The final phase will entail testing out the concept of an integrated end-to-end w-CBDC and r-CBDC. The white paper does not propose a timeline for the different phases of the project.

Indonesia’s Digital Rupiah project is the latest entry in a growing list of CBDC initiatives undertaken by central banks.

According to CBDC Tracker, over 50 countries are exploring a CBDC, 10 have advanced to the proof-of-concept stage, and seven countries including China have developed a pilot CBDC which has been tested in real world scenarios. As of now, only Jamaica and the Bahamas have launched a fully implemented CBDC.

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