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Embracing digital finance innovation in the financial sector omnibus
The regulation focuses on equipping authorities in the financial sector with sufficient access to regulate and supervise crypto-asset activities to ensure that these do not have a negative impact or affect the integrity and stability of the financial system.
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Future currency?: A representation of virtual currency Bitcoin and US$1 banknotes are seen in front of a stock graph. Some central banks have warned about significant speculative elements of bitcoin and other crypto assets. (Reuters/Dado Ruvic)
A survey by Google, Temasek and Bain & Co (2020) predicted that digital financial services in Southeast Asia would increase consistently and reach a value of US$1.2 trillion in 2025. Digitalization is indeed increasing the variety of products to meet the needs of businesses and consumers. Inclusion and the prospect for Indonesia's small and medium enterprises (SMEs) to become the country’s growth engine are mounting. The delivery of financial services is becoming more efficient, and lower net margins and better prices for financial sector users can be expected.
However, digital innovation is like two sides of a coin, where it offers great benefits but can cause potential disruption. If not approached carefully, digital financial technology can undermine trust in the financial sector and trigger financial sector instability that could set back Indonesia's vision for robust, sustainable and inclusive growth.
On the other hand, it is unavoidable that financial institutions are adopting, or will adopt, digital technology, with the difference between use simply the degree of digital reliance in their business models. In response to that challenge, the legal framework needs to move beyond a distinction between financial technologies and other financial institutions like banks, securities companies and insurance companies.
Due to business scale and interconnectedness, issues and risks such as consumer protection, data security, database utilization and financial system stability must be mitigated.
For this reason, there is a need for collaboration between types of business, which functions to expand public access to financial services, increase competitiveness and efficiency and sound legal guardrails to guide the financial sector. The legal framework to ensure that this transformation pays off for Indonesia's economic and social goals has been proposed through the omnibus law on the financial sector that the House of Representatives approved on Dec.15, 2022.
The Developing and Strengthening of the Financial Sector Law, after its ratification by the President, will become an opportunity to ensure that regulatory frameworks and approaches are sufficient to provide a solid basis to strike the balance between harnessing the benefits of digital finance innovation and containing their risks. The government is committed to promoting a deep and inclusive financial sector and embracing innovation in financial business models.
The omnibus law on the financial sector proposes a strategy in a five-pillar reform to 1) increase access to financial services, 2) expand sources of long-term investment, 3) improve competitiveness and efficiency, 4) provide alternative instruments and improve risk mitigation and 5) strengthen investor and consumer protection. The omnibus law also considers the role of regulators in the financial sector to achieve the vision: a financial sector that is deep, innovative, efficient, inclusive and reliable, as well as strong and stable. Therefore, the law lays the ground to strengthen the role and power of existing regulators and set up new related financial market infrastructure.
