CBDCs for Indonesia -2 (Lessons from International Experiments)

Global interest in CBDCs has steadily increased in recent times. Recent reports suggest that as many as 100-plus countries, are currently exploring a CBDC, up from just 35 countries two years back. How many of them like Indonesia are actively developing a national CBDC? How many are ahead of Indonesia? What can we learn from their experiences? Let us analyse some relevant data.

There are around ten countries that have fully launched their national digital currency. The list mostly includes small and very small economies, such as, the Marshall Islands, the eight countries in the Eastern Carribean, the Bahamas and Jamaica. It also includes Nigeria from the African continent. The Bahamas launched their sand-dollars in 2020. Nigeria, Africa’s largest economy, launched its CBDC e-Naira in 2021. Jamaica is the latest country to launch a CBDC, the JAM-DEX.

Around 15 countries have already undertaken pilot projects. The list includes heavyweights like China, Hong Kong, South Korea and Russia; Kazakhstan from Central Asia; Sweden, Lithuania and Ukraine from Europe; Saudi Arabia and UAE from the GCC; Thailand, Singapore and Malaysia from South and South East Asia.

Indonesia is in the league of another 25 countries that are developing a CBDC. This broad list includes Canada, EU, Australia, Brazil, India, Japan, Bahrain, Iran, Turkey. It also includes many small nations like Venezuela, Belize, Haiti, Mauritius, Palau, Cambodia etc.

Around 50 more countries are in research and exploration phase that includes USA and UK and many smaller countries dotted across the globe. A few countries like Denmark, Egypt, Azerbaijan and Argentina announced their interest in CBDCs, but are currently inactive. Two countries — Equador and Senegal — experimented, but went on to abandon the idea.

The term blockchain or distributed ledger technology (DLT) is invariably associated with cryptos or digital currencies and tokens. All countries where CBDCs have been launched with the exception of Jamaica use DLT alone. The Marshall Islands was the first to launch its digital currency using Algorand blockchain technology. Four countries in pilot phase (Sweden, South Korea, Saudi Arabia and UAE), and four in development phase (Brazil, Cambodia and Palau) also prefer blockchain or DL technology alone.

As many as fifteen countries including Indonesia see merit in both conventional (centralized) and DL technologies. This includes the Bahamas where CBDC is already launched, four countries in pilot phase (China, Russia, Kazakhstan, and Thailand) and ten countries in development phase (including India, Canada, UK, EU, Turkey and Bahrain)

Out of the five countries that tried with conventional technology alone, the only country where the project was launched and is currently operational is Jamaica. Projects became inactive in three other countries — Uruguay, Curacus and St Marten. Equador cancelled the project.

There have been interesting cases of international cooperation in the CBDC domain. Project DCash that involves the eight Eastern Carribean countries has already been launched. Project Digital Euro involves eight European countries and is in development phase. Project mCBDC Bridge involves China, Hongkong and Thailand and is in pilot stage. Project Aber involves Saudi Arabia and UAE in pilot stage. Project Dunbar involves Australia, Singapore, Malaysia in pilot stage and Australia in development stage.

What are the underlying reasons behind the increasing interest in CBDCs? Do these reasons differ across countries?

There are several compelling arguments and the motives that different nations have for creating CBDCs are dependent on the state of their economies. Increasing the efficiency of payments and reducing the costs of transactions; introducing competition and resilience in the domestic payments market, which might need incentives to provide cheaper and better access to money; promoting financial inclusion by making it simpler and safer for unbanked and underbanked populations to obtain financial services; creating programmable money and enhancing the transparency of monetary flows; and facilitating the smooth and unobstructed flow of money are some of the most common reasons for implementing such a system.

Are there significant risks with the shift to CBDCs? Do they vary across countries?

With CBDCs, there is a risk of individuals simultaneously withdrawing an excessive amount of money from banks, which might result in a run-on at the banks, leading to a reduction in banks’ capacity to lend. This presents an especially difficult challenge for nations whose financial systems are weak. CBDCs also provide operational risks because they are susceptible to cyber-attacks and need to be fortified against these threats in order to function effectively.

Last but not least, CBDCs require a regulatory structure that must first be strengthened before this technology can be adopted. This framework must include privacy, consumer protection, and anti-money laundering criteria. Before a country may begin implementing a CBDC, it is necessary for that nation to first address the many obstacles that must be overcome.

In the forthcoming posts, we look forward to taking a deep dive into a multitude of CBDC experiments and take stock of lessons, if any, for Indonesia.