Challenging the uncertainties of cryptocurrencies
Bank Indonesia (BI) has again reaffirmed its resistance toward the use of bitcoin and other cryptocurrencies in Indonesia. In a recent press statement released in January 2018, BI has given a clear warning to the public not to use, buy or trade any forms of cryptocurrency, and has also displayed the risks of virtual currency transactions.
This skepticism from our central bank is very disadvantageous for any virtual currency user in Indonesia and worldwide. Even though cryptocurrencies are still considered an unauthorized payment instrument in Indonesia, it is highly expected to bring benefits to the modern digital economy.
A cryptocurrency is a decentralized peer-to-peer digital currency that uses cryptography to generate currency units and verify and secure the transfer of funds. It operates independently of a central bank or monetary authority. BI has estimated the existence of more than 550,000 domestic users, transacting in more than 1,300 varieties of cryptocurrency. This is an important indication of the potential presence of cryptocurrency in Indonesia, and the number is strongly believed to increase in the future.
Although the ownership of a cryptocurrency such as Bitcoin and Ethereum is not considered yet illegal in Indonesia, the transaction of cryptocurrency and its use as a payment instrument is fully prohibited. This prohibition is regulated by two BI regulations, the first in Article 34 of Regulation No. 18/40/PBI/2016 on the processing of payment transactions, and the second in Article 8 of Regulation No. 19/12/PBI/2017 on the implementation of financial technology. Both regulations strictly prohibit the use of any kind of cryptocurrency in any payment systems made and used by payment services providers and financial technology players.
The reason behind this policy is to prevent illicit activities that utilize cryptocurrency, such as money laundering or terrorism financing, as well as to maintain the sovereignty of the rupiah as the sole legitimate currency in Indonesia. These concerns are very real, but might not be reasonable enough to completely ban the use of cryptocurrency. It is fundamental to keep an open and optimistic point of view if we seek to progress and benefit from the advancement of technology such as cryptocurrencies.
There are several issues that have been used by BI as arguments to forbid cryptocurrency transactions. The first issue is regarding the volatility of cryptocurrency value. The exchange rate of cryptocurrencies is very unstable, and the sharp fluctuation of its value is difficult to predict, exposing its vulnerability to the risk of a bubble that could potentially harm society.
However, if we take a closer look, cryptocurrency has no difference in the volatile nature of its value compared to any other investing of goods and commodities in the market. This is because its value is simply determined by supply and demand, with the influence of the latest trends and innovations.
The level of cryptocurrency circulation does not play a significant role in value determination due to the fixed base amount of cryptocurrency issuance. People interested in buying, trading or investing in cryptocurrency must be aware of its high investment risk, and if the user deeply understands and accepts those risks, then there is no need to ban cryptocurrency transactions.
Second is related to the anonymity and purpose of cryptocurrency transactions. Cryptography, used in cryptocurrency, allows pseudonymous transactions, meaning the parties involved could be anonymous by using pseudoaccounts. This might lead to suspicious and illicit activities if the transaction remains anonymous.
The solution to prevent this risk lies in the regulatory aspect and its enforcement. Cryptocurrency transactions can be safer if the regulation requires the user to reveal information regarding the transaction and the identity of each legally registered party involved. This sort of thing can be found in electronic certificates regulated in the Electronic Information and Transactions (ITE) Law, but currently applies only to general electronic transactions.
Therefore, a specific regulation on cryptocurrency transactions is essential. A strict administration and supervision of cryptocurrency is key to a safe transaction, and BI might be the perfect institution to hold such authority. If it is possible to implement on conventional financial transactions, then it will also be possible for cryptocurrency transactions.
The last issue is relevant to cybersecurity and consumer protection. Businesses that support and facilitate the public in cryptocurrency trading, such as electronic wallet start-ups and crypto-exchange providers, are vulnerable to cyberattacks. If Indonesia wishes to lead in the digital economy, then higher standards of cybersecurity and digital protection must be set in regulations.
These standards must be fulfilled by digital and financial technology organizations for them to be granted digital business operation licenses. A secure digital infrastructure provided by both government and business entities will bring a strong cyber-protected environment that will boost provider and consumer protection in cryptocurrency transactions.
It is important to highlight that cryptocurrency is one form of disruptive innovation and technology that creates a new market and value network, which will eventually disrupt the existing market and value network. It can potentially displace established markets and leading institutions, such as traditional banks and financial organizations. We do not want our authorities to lag behind disruptive technologies, nor digital innovations to roam wildly without being regulated.
Cryptocurrency transactions have great potential if implemented correctly. To achieve such a goal, a progressive approach of willingness and mutual consensus between digital business stakeholders and the government must be settled. Focusing only on its risks will lead us nowhere, but to promote the idea of fully transparent, cost-free, lightning fast and highly efficient digital transactions behind cryptocurrency platforms will surely bring wonders to mankind.
The writer works as a digital business and technology lawyer at Bahar Law Firm. The views in the article are his own.
Challenging the uncertainties of cryptocurrencies
Published in The Jakarta Post, 12th February 2018
Written by Bhirawa J. Arifi
Member of Digital Business & Technology at Bahar & Partners Law Firm