In line with the above developments, Bank Indonesia (BI) as the central bank is currently formulating a digital currency called the Central Bank Digital Currency (CBDC). The preparatory stage started several years ago when the emergence of blockchain technology made it possible to use cryptocurrency as “money”.

In BI's view, cryptocurrencies are not suitable to use as a medium of exchange. They do not have a solid valuation basis. With their highly volatile value, cryptocurrencies have the potential to disrupt the stability of the national financial system.

As an investment asset, cryptocurrencies also exhibit many disadvantages. The very limited supply of cryptocurrencies cannot keep up with the demand. As a consequence, cryptocurrencies become a speculative asset that overrides consumer protection.

For this point, the issuance of the CBDC is aimed at supporting payment security and the stability of the domestic financial system. The mitigation of potential risks that are most likely caused by digital money facilitated by information technology companies is a secondary reason.

In a narrower scope, the issuance of the CBDC is directed at attaining efficiency in the domestic payment system, increasing financial inclusiveness and eliminating shadow banking. The cashless society that has been initiated by BI over the last decade will undoubtedly be realized quickly.

Although it supports a country’s economic progress, the issuance of the CBDC is inseparable from a number of fundamental problems that need to be resolved first. The level of public acceptance should absolutely be a major concern. The level of acceptance is largely determined by the degree of digital literacy.

So far, people know that digital money is still limited to electronic money (e-money). By definition, electronic money is a payment instrument issued by the private sector/industry and is the obligation of the issuing institution to its holder. Meanwhile, the CBDC is issued by BI and becomes part of its monetary obligations.

Accordingly, the substitutability aspect between the CBDC and electronic money is the next crucial issue. The public's reluctance to use the CBDC as a medium of exchange – both in large-scale transactions and transactions at the retail level – undoubtedly makes CBDC issuance suboptimal.

Even if the public is willing to use the CBDC, the problems do not stop there. The movement of electronic money will be replaced by the CBDC. While electronic money charges a top-up fee, the CBDC (as paper money or coin) is free of charge. Banks and financial technology will be affected.

As a consequence of the CBDC, economic actors who use it in their transactions must have an account at the central bank. This means that the public can directly interact with the central bank instead of through a commercial bank, and so BI has the dual role as the “bank of banks”, as well as a commercial bank.

In addition, the release of the CBDC still provides opportunities for direct peer-to-peer contact. This will impact the role of commercial banks as financial intermediation institutions — bridging parties with excess funds and those who need funds — will be affected.

The shrinking role of intermediation means that commercial banks cannot freely create “secondary money” from the rupiah that is saved by the public in banks. Consequently, BI does not have an agent in implementing its monetary and macroprudential policies. The span of control is a challenge that must be anticipated.

The hybrid CBDC model can indeed be an optimal alternative solution for BI and commercial banks. The function of BI as a monetary authority and commercial banks as intermediaries are maintained. However, the main problem is that the potential for banks to experience liquidity shortages remains a threat.

Under the problematic configuration above, the transition period is the critical point. Literacy and education are key. The CBDC will be closely related to banknotes, coins and electronic money. The dominance of digital transactions may not be fully included in the data on the money supply.

The CBDC’s enforcement will depend on the capacity of information technology used by BI. The sophistication of information technology makes it easier for BI to monitor the circulation of digital money. Digital transactions will record the changes in the money supply so that BI can detect potential inflation.

Also, its compatibility with the international network system assists BI in observing the movements of money across countries that have an impact on the supply of financial market liquidity, foreign exchange reserves and exchange rates. Consequently, foreign exchange reserves also demand adaptation to cryptocurrency.

However, it must be admitted that BI's main difficulty is that there is no best practice as a reference. Countries around the world are still grappling with the most appropriate elementary CBDC design. The ability to see the future with all the probability of change requires a specific intelligence of thinking.

In the end, if all the above issues can be addressed, the CBDC will undoubtedly become a digital representation of the rupiah, which is a symbol of sovereign currency.

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The writer is a professor of economics at the School of Economics, State University of Jakarta, and research director at the Socio-Economic and Educational Business Institute (SEEBI), Jakarta. These views are personal.