Digital Rupiah and Latent Risk to Banking Business

Digital Rupiah and Latent Risk to Banking Business

The digital rupiah is a new form of money issued directly by the central bank. In its ideal form, it can make monetary policy more effective, but perhaps not for the banking business in the future. And this is happening in China through digital yuan which was developed in 2014 and started to be tested since 2020.

The discourse on the issuance of digital rupiah by Bank Indonesia (BI) is getting narrower. The Central Bank of Indonesia said it would publish the general draft of the Central Bank Digital Currency (CBDC) by the end of 2022, against the backdrop of the widespread risk of using crypto assets globally as alternative means of payment.

“In order to overcome the risks to the stability of thesecrypto assets, a regulatory framework is needed to overcome them. In addition, the existence of crypto assets is also the background for the central bank in exploring the design and issuance of the Central Bank Digital Currency (CBDC) or digital currency issued by the central bank. 

Bank Indonesia continues to study CBDC and at the end of this year is at the stage to issue a digital rupiah development whitepaper," explained Bank Indonesia in its official statement on July 12, 2022, regarding the 2022 Digital Financial Economy Festival held in Bali.

BI's statement is very easy to interpret, that the central bank actually recognizes crypto assets (the Bank for International Settlements uses the term "cryptocurrency"), in terms of time and cost efficiency as a tool and cross-border payment system.

It's just that crypto, say for the dollar-valued stablecoin (USDT), is still in the gray area, because it is not specifically regulated as a method of payment. In Indonesia itself, by the Ministry of Trade/CoFTRA, it is only recognized as a crypto asset commodity.

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With the central bank keeping its distance from stablecoins, which in principle are a new form of digital money, as well as wanting to have more control over them, the central bank has been talking for the last 5 years to create its own digital currency.

As in the term, CBDC (central bank currency), digital rupiah is actually still fiat money, its value is still rupiah, but issued directly by the central bank, not through a mechanism through commercial banks as it is today, whose "money creation" principle was introduced since 1970s by the Fed.

So, what is the difference between digital rupiah and electronic money (e-money) which is used every day by Indonesian citizens, such as OVO and GoPay and so on for the purchase of goods and services?

In the eyes of financial technology, electronic money worth rupiah is actually digital. The difference lies in the way, the path and the parties involved to publish it. It also intersects with other forms ofmoney, based on its specific function.

Yes, it is true that the laity answered that rupiah currency was issued by the central bank. However, it is not that simple. What actually happens is through commercial banks, the central bank is the root.

In "modern money creation", which was first designed by the Fed since 1970, after the value and circulation of the US dollar was no longer pegged to gold reserves, money was issued and circulated through the following (simplified) mechanism.

First, the government issues bonds (bonds). These state securities are "government statements" so that the central bank will issue large amounts of money needed by the government which will later be used to finance state spending, including for civil servants salaries, construction of hospitals, schools and so on. This amount is stated in the State Revenue and Expenditure Budget

Second, in order for the bonds to be used as “money”, they must be sold through commercial banks and some of them can be purchased as investment instruments by ordinary people. We know it as Indonesian Retail Bonds.

Third, and some of the debt securities are purchased by the central bank and become part of the assets on its balance sheet, as the underlying asset for issuing money on the market, either in the form of electronic money or electronic/digital money.

Because of the good cooperation between the government's ministry of finance and the central bank, we find their signatures on all the banknotes issued and we use them every day. And we feel the electronic form in the form of OVO and GoPay, for example, which are bank products or financial technology companies.

So today's digital/electronic rupiah currency is not a digital form of rupiah from the central bank directly, but additional services from banks and other private companies. The function and role of the central bank in this regard is supervision and control, together with, for example, theFinancial Services Authority (OJK).

If we dig carefully, then the role of commercial banks is actually an "intermediary" in this money creation process. Like the role of intermediaries, there are costs in the process of distribution and circulation of money.

This is where CBDC, the digital rupiah plays its role, which can deterministically reduce the role or existence of banks. In other words, you individually will have a direct banking account in the central banksystem.

So, if the process of issuing digital rupiah can be done without going through commercial banks, then cost and time efficiency can be achieved, especially in the case of Bank Indonesia implementing a moreeffective monetary policy.

When the role of banks can in principle be eliminated through central bank digital currencies, specific latent risks and dangers arise.

This was emphasized by the IMF at a conference in Bali regarding digital rupiah, that at this time, it is not clear whether CBDC will have an advantage over deposits with the conventional banking system.

"For example, if a CBDC does not offer interest rates and a commercial bank has good deposit guarantees, then commercial banksavings may be just as safe, but offer higher returns," said Tommaso Mancini Griffoli, Division Chief in the Monetary and Capital Markets Department of the IMF.

He revealed, banking has now begun to transform towardsdigital and offers convenient digital products for customers.

This, he said, was the fruit of the bank's understanding of its customers and experience in developing digital products. Commercial banks have also been able to create digital products that are more attractive than the current CBDC concept.

 

What is meant by the IMF is a warning sign, that while CBDCs are able to offer efficiency, at the same time, if the central bank fails to provide benefits in the form of "interest", including attractive features compared to commercial banks, the digital rupiah may not be useful. This CBDC and banking business controversy has occurred in Russia, related to the digital ruble plan.

In other words, if the opposite happened, the digital rupiah, which is a direct product of Bank Indonesia, would be able to match commercial bank-style financial products, so the current banks may no longer be needed, because everything has been worked on by the central bank.

To quote an article by Christopher Yates: Central bankdigital currencies (CBDCs) could represent the biggest change to the financial system since Bretton Woods. CBDCs can completely change the global financial system and, ultimately, can redefine the nature of money itself.

As hinted by the Bank for International Settlements and interpreted by Yates, that the background to the design and development of CBDCs is that CBDCs allow direct interaction between central banks and individuals.

“Central bank stimulus measures will no longer be constrained by the whims of commercial banks and private sector credit creation. 

Rather than relying on bank profitability, regulation and credit demand to influence the money supply in the real economy, the Fed will be able to inject liquidity directly into individual consumers and businesses themselves. Such a form of central bank digital currency would literally transition the central bank from being a lender of last resort to being a last (or first) shopper of choice,” Yates said.

In relation to the political culture of a country, CBDC is more effectively applied to its full potential in a relatively centralized and non-democratic country such as China, because it is more efficient in making decisions and regulations for system changes.

No wonder digital money is issued faster in the country and becomes the first country in the world, as a new effort to make the value of their money more visible in other countries. Let's call this a slick plan for dedollarization and starting to marginalize the role of electronic money by private companies.

Especially for digital rupiah in Indonesia, of course the story is different, because it requires political friction and regulations that are exciting and take a long time.

Waiting for digital rupiah, let's just wait for digitalfiat money in other countries, such as digital won, yen, digital dollars and so on, whether it is really effective, while seeing the potential it can stand side by side with stablecoins.

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