At the latest annual meeting of Indonesia’s central bank (Bank Indonesia), this lender of last resort presented a white paper on the digital rupiah (central bank digital currency, or CBDC). Just like what is happening abroad (and likely also in response to the rise of cryptocurrencies), Bank Indonesia is eager to launch a digital rupiah, possibly ultimately aiming to gradually phase out the use of physical money (notes and coins).
A digital currency carries a couple of advantages:
- Digital currencies allow instant transactions as they are not confined by space and time. In fact, cross-border transactions should become easy and affordable, provided parties are connected to the same network;
- When using digital currencies transactions become fully transparent as there exists a record of the transaction. In the case of physical money the transaction is often not recorded. And therefore, digital currencies are valuable tools to fight matters such as corruption, terrorism, and tax-evasion;
- Central banks can save on the manufacturing of physical money (although digital infrastructure certainly comes with a price tag too);
- Monetary policies can be more effective as central banks can directly reach citizens (without the need for banks or other financial institutions as intermediaries). This, in theory, means that a central bank can send an amount of digital money to peoples’ accounts that can only be spend on (for example) grocery shopping (and it can be programmed that this digital amount expires on a certain date to encourage people to actually spend it, instead of saving it). In terms of guiding inflation, this would be a very effective tool.
However, there are also a number of disadvantages of a digital currency:
- Digital infrastructure and technology – such as a high-quality Internet connection and a smartphone – is crucial. In a country like Indonesia where not all people own a smartphone or have Internet access, this would be problematic;
- Online wallets need to be carefully protected from hackers;
- Banning physical money means that the government (through the central bank) has full control over your life. In theory it means that if you express criticism on the government (or if you, for example, refuse to take a COVID-19 booster shot because you want to wait for evidence regarding its efficacy and safety), your digital wallet could be blocked instantly.
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