The Urgency of Issuing a Central Bank Digital Currency

By Rahmat Nur Khairy & M. Abrar Tasnim Economics Student at University of Brawijaya

• ARISE OF CRYPTOCURRENCY'S AND THE EFFECTS TO MONETARY SYSTEM

Cryptocurrency, in general, is a digital currency that is systemized as a form of media for transactions carried out by the public. Cryptocurrency is a currency that was born from a cryptographic system with the aim of securing decentralized financial transactions between peer to peer. Cryptocurency cannot be separated from the background of the birth of blockchain technology. 

Blockchain itself can be understood as an innovative digital ledger (database) that is duplicated and distributed across a network of computer systems, so that this system is able to allow several people to be involved in a transaction. This is because blockchain is able to provide a decentralized system with a verification system based on trust between the parties involved by involving the art of cryptography to encrypt transaction data as a form of verification and securing transactions from outside parties. From this system, various forms of currency can be born that are deemed reliable as a medium of exchange by the party conducting the transaction.

One of the cryptocurrencies that is well known to the public is Bitcoin. Bitcoin is the first currency born from the blockchain system. Bitcoin and blockchain were discovered by a character named 'Satoshi Nakamoto'. The existence of Bitcoin, which is known as digital gold, its circulation system can be likened to the discovery of gold which is distributed in the form of money as a medium of exchange, a unit of calculation, and a store of value. 

According to an analyst, Desjardins, in 2017, the market capitalization of Bitcoin, as a representative of cryptocurrency, its capitalization peak had reached 100 million USD, which is about 1.3% of the total world cash circulation (7.6 trillion USD), and amounting to less than 1.3% of the world's gold reserves (USD 7.7 trillion).

On the other hand, there is a new innovation in cryptocurrency, namely stablecoins, which are new innovations from cryptocurrency. This coin tries to offer price stability. Stablecoins are supported by or relative to a particular asset or a diverse set of reserve assets. With the underlying asset in this type of cryptocurrency, the level of volatility and value stability can be maintained. 

There are three methods of working stablecoins in maintaining their value, one of which is supported by fiat money, supported by cryptocurrency, and algorithmic. One of these interesting methods is algorithmic, where the level of coin distribution is maintained by an algorithmic system and is based on supply-demand analysis that occurs in the market, this is similar to the central bank's monetary policy in managing the circulation of money in society, but in a digital form. 

The main focus of Stablecoin at this time is that it can be adopted as a payment medium for online transactions (e-commerce), peer to peer payments, and payments with small nominal values (micropayments). With the decentralized system of the cryptocurrency system and the stability of the value provided, stablecoins provide an overview of the weaknesses of other volatile cryptocurrencies, so that the three main functions of money can be achieved and can provide a new opportunity for stablecoins to be accepted in society as payment medium. Based on data from BIS (Bank for International Settlements), there was a significant increase in the market capitalization of stablecoins.

However, there are some challenges and risks if the massive distribution of Stablecoins is. According to Fabio Panetta, Member of the ECB Executive Board, one of the challenges is how stablecoins can penetrate the legal legality of the international world and the risk if there is improper management of the underlying asset. 

According to the Bank of International Settlements, stablecoins must be protected by assets that have a good and strong fundamental value. The supporters of stablecoins will greatly determine the fundamental strength of the digital money. When a stablecoin is protected (backed) by a risky asset, the fundamental strength of the stablecoin will be very vulnerable, especially when there is a turmoil in the market.

In conclusion, currently, the effect that cryptocurrency in general, or stablecoins has on in particular, on monetary stability is still quite limited. This is due to the relatively small market capitalization and imperfections of these exchange commodities. With this imperfection, there is still little space for cryptocurrencies, especially stablecoins, to influence the international monetary system. However, governments, especially monetary institutions, require a deeper and periodic analysis of the dynamic development of cryptocurrency itself.

• ISSUING A CBDC  

Currently the global community has carried out digital transaction activities through several media transactions, such as e-money, e-wallets, etc. Peer to peer digital transactions and categorized as micro-payments, are currently supported by several media transactions provided by several big-tech or fintech companies. So, with the existence of various digital transaction media, why do we need a currency that is standardized and supported by the stated? Isn't the provision of Qris, e-money, and other e-wallets able to meet the conditions of market demand for the current digitization of transactions in Indonesia?

To answer this question, of course we must return to the background scenario for the formation of one of the CBDCs in the world, namely China, which has already conducted a pilot project on its digital currency commodity. The Chinese economy, especially the process of cellular transactions (mobile), is controlled mostly by two big-tech big-techs, namely Ant Group with its payment system Alipay (54.7%) and Tencent with its electronic wallet, WeChat Pay (37%). 

From this condition, it is feared that a monopoly process from domination of the market by the two big companies could occur. In Indonesia, one example is OVO and Gopay. Bank Indonesia noted that these two electronic wallets controlled the electronic money market share of 20% and 19%. On the other hand, the electronic money market is also dominated by several banks and other fintech companies.

With certain parties who control the digital transaction market, this can encourage a monopoly process against other market players. Based on the statement from Fabio Panetta, market domination by bigtech can make it easier for these companies to reach and obtain consumer behavior data. The data can be in the form of a database in the form of various transaction data that have been carried out by various consumers so that the company can have access to various preferences and needs of today's consumers. 

As a result, these companies can provide an integrated service system through a binding of goods and services or commonly known as bundling. This can make consumers bound and have limitations in their consumption choices and preferences, and thus can threaten competition in the market against other market participants. This phenomenon can lead to a term to "the winner takes all", that is, companies that are able to survive until the end of market competition can dominate the market as a whole as the only existing producers.

On the other hand, there are several reasons for the application of CBDC as a medium for digital transactions. The central bank, as the agency responsible for monetary policy, has an obligation to maintain the stability of the currency, banking sector and the financial system as a whole. The central bank has a mandate, both explicitly and implicitly, to provide a medium of payment that is reliable, and can provide good security and efficiency. 

The current development of market digitization has encouraged central banks to adapt in providing safe and trustworthy payment media for consumers as a medium of exchange value. The central bank also focuses on increasing efficiency in the monetary system through the application of CBDCs in the community. This efficiency can be achieved through several advantages possessed by CBDC. One of them is cost efficiency, simplifying accessibility, encouraging financial inclusion, facilitating cross-border payments, making it easier to implement fiscal policies through digital systems, and protecting public privacy from database management by private parties.

• CHINA CBDC AND INDONESIA BEST DESIGN CBDC'S

China is currently conducting a pilot project against its digital currency e-CNY. The CBDC model currently implemented in China uses a retail or general purpose hybrid model. The initial policy carried out by the Chinese government was to distribute e-CNY vouchers of 200 Yuan, with a total of 200,000 vouchers in the city of Shuzou, then in the city of Shenzen worth 10 million Yuan, and this year vouchers were distributed in Beijing and Chengdu. Vouchers that are distributed in the form of e-CNY, can be spent through the e-commerce platform, namely JD.com.

Then what about Indonesia? According to research published through the Bank Indonesia bulletin, the current suitable CBDC for Indonesia is CBDC which has similar characteristics to conventional cash. The nature of this CBDC is similar to the general purpose model or the retail CBDC model. 

By using the Delphi-Analytics Network Process method, it shows that the current market conditions in Indonesia are guided by peer to peer transactions. Another supporting factor for the suitability of this model is that China also uses the same model and scenario, namely the retail hybrid model. This may be due to the similarities in the transaction markets in China and Indonesia. On the other hand, according to PwC, currently the fintech industry in Indonesia has a simillar process to the fintech industry in China which developed in 2013.

• CHALLENGE AND RISK

The application of CBDC certainly cannot be separated from several discussions about the challenges and risks. There are a number of challenges and risks that need to be mitigated when CBDC is seriously applied in the community. The role of commercial bank intermediation may gradually disappear and there will be disintermediation in the financial system. Although the application of the CBDC hybrid model will not eliminate the role of commercial banks as a whole, there are several impacts that can disrupt a country's banking and financial systems, one of which is a decrease in third-party funds.

In addition, the application of CBDC can change people's behavior in shifting the allocation of funds from commercial banks to the central bank. If there is financial instability in a country, This can lead to massive withdrawals of funds (bank runs) from commercial banks and have an impact on liquidity in the banking sector. As a result, the banking sector can affect a country's financial and economic system. A decrease in loan funds from banks to the public can result in reduced financing for all economic sectors.

On the other hand, CBDC can lead to a phenomenon called currency substitution or digital dollarization. Currency substitution is a phenomenon when a resident in a country prefers to use foreign exchange rates to support his domestic transaction activities. This can occur due to the nature of the CBDC which supports cross border payments. Cross-border transactions can indeed be new opportunities and facilitate transaction activities between countries. However, this can pose a threat to countries that have a fundamentally weak monetary and economic system. When a country has a high level of volatility in the value of inflation and its exchange rate, this encourages currency substitution. 

This phenomenon can be exemplified through the phenomenon of dollarization in Venezuela. The decline in the buying power of the Bolivar with other currencies, resulted in a decrease in the value of the currency's confidence and safety in the community. As a result, the public chose to replace the domestic exchange rate with a foreign exchange rate which was considered more stable, in this case USD.  If we return to the CBDC case, the existence of CBDC can even encourage the occurrence of this phenomenon, market players can be motivated to replace their preferences for media transactions with certain currencies that are considered to have a better level of stability and security. the public chooses to replace the domestic exchange rate with a foreign exchange rate which is considered more stable, in this case USD.  

On the other hand, infrastructure readiness and community digital literacy are important references when the CBDC implementation is actually carried out. Currently the government has a big responsibility in the process of equitable development throughout Indonesia. This unpreparedness, both infrastructure and literacy, can lead to a widening inequality in development in society. Thus the impact of implementing CBDC itself will be deemed ineffective and will have an impact on wasteful financing in the implementation process.

• CBDC IN ISLAMIC PERSPECTIVE

As we know, Indonesia is a country with the largest Muslim population in the world, therefore it is better if we discuss the problems and responses of Islam to CBDC as reference material for the future development of CBDC in Indonesia. The definition of money in Islam is as a determinant of the value of an item and a medium of exchange that can be used in various transactions, money itself must meet two conditions, namely first, psychological requirements, namely that money must be able to satisfy the various desires of the person who owns it so that all people want to acknowledge and accept it. 

Second, technical requirements are the conditions attached to money, including durable and not easily damaged, easy to divide without reducing value, easy to carry, relatively stable value, not excessive in quantity, and consists of various noun values. It should be remembered that in Islam money is not a commodity that is traded directly and acts as a tool in a contract and it is haram to use money as a commodity for profit.

Then what about CBDC? Is it appropriate and acceptable as a currency in Islamic law? In contrast to traditional digital currencies which do not have fixed assets as guarantor and tend to be unstable, CBDC is a system controlled by the government and and its value is guaranteed by the government, therefore we can conclude that the government determines and recognizes a cryptocurrency as currency. It is lawful for its citizens and can be used as a medium of exchange. But it needs to be remembered here that as a currency the CBDC will also be subject to laws on the use of traditional money in Islam, among which the most common is its designation as ribaiyyah goods and various other laws in accordance with the Qur'an and as-Sunnah.

REFERENCES

Arner, D., Auer, R., & Frost, J. (2020). Stablecoins: risks, . Bank for International Settlements.

Bank for International Settlements. (2020). Central bank digital currencies: foundational principles and core features. Bank for International Settlements.

Deloitte Tax and Consulting, SARL. (2020). Are Central Bank Digital Currencies (CBDCs) the money of tomorrow? MarCom Deloitte Luxembourg.

European Central Bank. (2019). Crypto-assets – trends and implications. European Central Bank.

Ilyas, R. (2016). KONSEP UANG DALAM PERSPEKTIF. Jurnal Bisnis dan Manajemen Islam , 36-55.

Indrastuti, R., Ginulur, A., Hasniawati, A., Mubar, B., Zahra, F., & Fauziah, I. A. (2020). DESIGNING CENTRAL BANK DIGITAL CURRENCY FOR. Bulletin of Monetary Economics and Banking, 411-438.

Panetta, F. (2021, 02 10). Evolution or revolution? The impact of a digital euro on the financial system. Frankfurt: European Central Bank. Retrieved from European Central Bank: https://www.ecb.europa.eu/press/key/date/2021/html/ecb.sp210210~a1665d3188.en.html

Pransuamitra, P. A. (2021). Rupiah Digital vs Bitcoin, Apa Perbedaannya? CNBC Indonesia.

Subagja, I. (2018, 01 01). 11 Poin MUI tentang Bitcoin yang Diharamkan Sebagai Investasi. Retrieved from Kumparan: https://kumparan.com/kumparannews/11-poin-mui-tentang-bitcoin-yang-diharamkan-sebagai-investasi/full

Tomić, N., Violeta Todorović, & Božidar, Č. (2020). THE POTENTIAL EFFECTS OF CRYPTOCURRENCIES ON MONETARY POLICY. The European Journal on Applied Economics, 37-48.

Wibowo, P. T. (2021, 03 05). Apa Itu Central Bank Digital Currencies (CBDC)? Retrieved from WartaEkonomi: https://www.wartaekonomi.co.id/read330789/apa-itu-central-bank-digital-currencies-cbdc?page=2

Wibowo, P. T. (2021, 03 05). Apa Itu Stablecoin? Retrieved from WartaEkonomi: https://www.wartaekonomi.co.id/read330823/apa-itu-stablecoin?page=1

Xiao, E. (2017, 04 20). How WeChat Pay became Alipay’s largest rival. Retrieved from techinasia: https://www.techinasia.com/wechat-pay-vs-alipay

Zhang, T. (2020). New Forms of Digital Money: Implications for Monetary and Financial Stability. International Monetary Fund.

Wibowo, PT (2021, 03 05). What are Central Bank Digital Currencies (CBDC)? Retrieved from WartaEkonomi: https://www.wartaekonomi.co.id/read330789/apa-itu-central-bank-digital-currencies-cbdc?page=2

Wibowo, PT (2021, 03 05). What are Stablecoins? Retrieved from WartaEkonomi: https://www.wartaekonomi.co.id/read330823/apa-itu-stablecoin?page=1

Xiao, E. (2017, 04 20). How WeChat Pay became Alipay's largest rival. Retrieved from techinasia: https://www.techinasia.com/wechat-pay-vs-alipay

Zhang, T. (2020). New Forms of Digital Money: Implications for Monetary and Financial Stability. International Monetary Fund