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The future is here: Central Bank Digital Currency
With the digital rupiah, the public will gain access to risk-free digital currency denominated in rupiah.
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A picture shows the first Italian Bitcoin crypto currency shop. (AFP/Pierre Teyssot)
T
he 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 behavior 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 decentralized 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 such sentiment, under Indonesia's presidency in 2022, the Group of 20 central banks together with international organizations 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 prioritizes 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 digitization initiatives, including QR standardization and Open API for payments as well as development of fast payment systems.
