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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.

Apri Sya’bani (The Jakarta Post)
Jakarta
Wed, January 11, 2023

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Embracing digital finance innovation in the financial sector omnibus

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.

To embrace digital innovation and provide legal certainty, mitigate its risks and protect the public from illegal digital financial innovation practices, the law strengthens the legal basis for an entity conducting digital financial innovation, for digital financial innovation sandboxing, licensing and registration, the implementation of a risk-based supervision framework for fintech companies including its financial conglomerations, regulatory coordination and supervision amongst authorities for market efficiency and the role of associations to support oversight by authorities.

The law also regulates the principles of rights, obligations and agreements between consumers and digital innovation business entities, improves data protection and strengthens the dispute resolution mechanism for consumer protection. 

In addition, due to the increasing interconnectedness with the traditional financial system, but unpredictability because of its rapid evolution, crypto-asset activities are also stipulated as one of the sectors included in the financial sector omnibus law as part of the financial sector technological innovation.

It is understandable that crypto adoption is happening everywhere, and Indonesia has rapidly growing markets for crypto assets, including its retail-focused crypto brokerage. According to the Indonesian Commodity Futures Trading Regulatory Agency (Bappebti), there were 16.55 million crypto investors in Indonesia as of November 2022. This figure exceeds the number of capital market investors at 10.3 million as of December 2022.

However, attention must be given to these assets, as the recent turmoil in the global crypto-asset markets highlights their inherent volatility and structural vulnerabilities. The increased number and value of crypto scams are a growing cause for concern. In 2021, there were around $14 billion of scams in crypto, following the growing size of crypto exchange hacks along with the rising prices of crypto. In 2019, Indonesia contributed 11 percent of the total victims to crypto scams in the world, the second highest number in the world (Statista). 

In response to the growing concern surrounding crypto-market scams and exposure to the financial market, international standard setters such as the Financial Stability Board mandated by the Group of 20 call for an effective regulatory framework to ensure that crypto-asset activities posing risks similar to traditional financial activities are subject to the same regulatory outcomes while taking into account novel features of crypto assets.

To ensure alignment with the regulation of activities in the financial sector and to prevent its spillover into financial sector instability, activities related to digital financial assets, including crypto assets, need to be regulated by the authorities in the financial sector.

The regulation of crypto assets in the bill does not recognize crypto as currency. It focuses more on equipping authorities in the financial sector to have sufficient access to regulate and supervise crypto-asset activities in order to ensure that these activities do not have a negative impact/affect the integrity and stability of the financial system.

However, the regulation also gives this innovation room in the financial sector, such as through sandboxing. In line with the direction of international practices and the development of fintech and the digital economy, the core concept of the omnibus law’s legal framework in accommodating innovation is clear: to encourage the same activity, same risk and same regulation.

The legal and regulatory framework principle also emphasizes balance in securing the benefits of financial technology and ensuring that consumers' benefits and stability are maintained.

In order to respond to and anticipate a more integrated and rapidly developing financial business activities, the law also expands the Financial Services Authority (OJK) mandates and, as a consequence, the number of its commissioner members. Some of these reasons are to embrace digital finance innovation and to prepare for the shift of the authority to regulate and oversee crypto assets from Bappebti to the OJK.

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The writer is an analyst at the Center for Financial Sector Policy, Fiscal Policy Agency, the Finance Ministry. The views in this article are her own.

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