Two sides of a (Bit)coin

Every business involved with crypto assets in the Indonesia market should be aware of regulatory and policy changes by the Indonesian regulators – the Financial Services Authority (Otoritas Jasa Keuangan, the OJK) and the Central Bank of Indonesia (Bank Indonesia).

The regulatory and policy changes are a response to the “unconventional” source of systemic risk facing Southeast Asia’s largest economy faces. The systemic risk comes from new technologies and products. These innovations have driven OJK and Bank Indonesia to respond.

Indonesia’s position: blocked for payment, allowed as a commodity

Indonesia has seen a rise in the use cryptocurrency over the last three years. As of October 2021, there were more than 9.5 million cryptocurrency investors in Indonesia. That number is growing.¹

Despite the growing numbers, the OJK and Bank Indonesia have remained cautious. They have affirmed a strict prohibition on the use of cryptocurrency as legal tender in Indonesia. This is in line with Law No. 7 of 2011 on Currency. Law No. 7 states that rupiah shall be used as legal tender for any transactions within Indonesia.

Through its recent public statement, the OJK has also prohibited financial services institutions from using, marketing or facilitating crypto asset trading.² These restrictions have the potential to constrain innovation in the cryptocurrency space. In particular, the restrictions constraint the development of a larger cryptocurrency payment ecosystem for daily payment activities.

We also note that Bank Indonesia is currently developing a central bank digital currency as a response to this financial disruption. This move is in line with the researches and discussions, which are currently being conducted by other central banks such as the People’s Bank of China and the US Federal Reserve.

Meanwhile, the Indonesian government has taken a “middle ground” by considering crypto assets³ as a commodity. This position is affirmed by the Ministry of Trade Regulation No. 99 of 2018, which is the legal foundation for the architecture of the crypto asset regulatory framework. This regulation stipulates that crypto assets as commodity and are traded through a commodity exchange. The Indonesian Commodity Futures Trading Regulatory Agency (BAPPEBTI) is the authority to supervise and regulate the crypto assets transactions.

The main guidelines issued by BAPPEBTI for crypto asset transactions are stipulated under BAPPEBTI Regulation No. 8 of 2021 – Guidelines of Crypto Asset Transactions in Futures Markets (Regulation 8/2021). Regulation 8/2021 covers crypto asset and licensing requirements; the rights and obligations of key players (including crypto asset traders); the role of futures exchanges, crypto asset traders, futures clearing agencies and crypto asset storage providers; and governance.

Trading requirements

Under Regulation 8/2021, before a crypto asset can be traded in Indonesia, it must:

• be based on distributed ledger technology;
• be a utility crypto or asset-backed crypto (e.g. stable coins); and
• pass the assessment imposed by BAPPEBTI.⁴

Currently, Indonesia’s whitelist on legally traded crypto assets is stipulated under BAPPEBTI Regulation No. 7 of 2020 – the Stipulation of the List of Crypto Assets that are Allowed to be Traded in the Crypto Asset Physical Market. The whitelists lists down 229 crypto assets that can be legally traded and this includes Bitcoin, Ethereum, Tether and XRP/Ripple.

Due to the growing number of players in the market, we expect that BAPPEBTI will amend the whitelist to cater the market development.

An interesting side note is that Regulation 8/2021 clearly states that the regulation shall not be applicable to initial coin offerings (ICOs) and initial token offerings (ITOs). This provision implicitly affirms Indonesia’s ban on ICOs and ITOs, although we note that some Indonesian investors have invested in ICOs and ITOs in other crypto-friendly countries.

Trader requirements

Regulation 8/2021 also sets out the standards for becoming a crypto asset trader in Indonesia. A crypto asset trader must be established as a single-purpose company, and it cannot conduct any other business activities. Before conducting trading activities, a crypto asset trader must:

• have a minimum paid-up capital of approximately USD5.6 million in rupiah and retain at least 80% of its total paid-up capital;
• establish a corporate organisation comprising the required divisions, such as information technology, audit, legal, customer service, client support and accounting and finance;
• establish an online trading infrastructure connected to futures exchanges and futures clearing houses;
• establish a set of trading rules and standard operational procedures for trading and transactions;
• employ an officer who is a certified information systems security professional; and
• have a board of directors, a board of commissioners, shareholders, controlling shareholders and/or ultimate beneficial owners who have passed the fit and proper test conducted by BAPPEBTI.⁵

The requirement to obtain BAPPEBTI’s prior approval extends to any change of management composition, address, company name, shareholding composition, system, trading rules and other changes, including the opening of a branch office.

As part of its supervision, BAPPEBTI also has the authority to have read-only access to the trading system used by a crypto asset trader. The latter provision is interesting as it opens up the potential risk of proprietary trading algorithms being disclosed to the regulator. We are not aware of any other countries with similar requirements.

There are four types of trading activities that can be conducted by crypto asset traders in Indonesia under Regulation 8/2021. These are:

• the sale and purchase of crypto assets using rupiah;
• trading between one or more types of crypto asset;
• the storage of crypto assets owned by crypto asset subscribers (i.e. customers); and
• the transfer or assignment of crypto assets between wallets.

Any other type of trading activity is subject to prior approval by BAPPEBTI, and any crypto asset transaction is subject to daily and monthly reporting by crypto asset traders to BAPPEBTI.

What the future may bring

Regulation 8/2021 is an overarching single regulation that covers various regulatory issues regarding crypto asset trading activities in Indonesia. This regulation promises to help develop Indonesia’s cryptocurrency market infrastructure. However, the country has yet to establish a futures exchange and futures clearing houses for crypto assets.

We understand that some foreign investors have teamed up with local digital and fintech companies. They aim to establish futures exchanges and futures clearing houses for crypto assets and ultimately, to develop the cryptocurrency ecosystem in Indonesia. Some crypto asset traders have successfully raised funding internationally for the purposes of expanding their business activities and building brand awareness in the market.

While there is still no certainty that crypto assets will be accepted as payment in Indonesia in the future, we are seeing efforts by Indonesian regulators to establish a crypto-friendly ecosystem in the country, even with the lack of a regulatory precedent and the government’s strong desire to protect retail customers and monitor anti-money laundering and terrorist financing.

It remains to be seen on how players in the banking and financial industry will respond to the opportunity and new regulations and how the regulators will respond to crypto market activity under the supervision of BAPPEBTI.

<sup><sub>1. Retrieved from https://money.kompas.com/read/2022/01/07/170000226/bitcoin-dkk-makin-digemari-jumlah-pengguna-dan-transaksi-indodax-tumbuh-pesat
2. In addition to the statement by the OJK, in November 2021, the Indonesian Ulama Council (Majelis Ulama Indonesia) issued a fatwa declaring that cryptocurrency is prohibited (haram) as a transactional tool. It only can be used as a commodity or digital asset as long as it complies with Shariah principles, it is backed by underlying assets and it shows clear benefit for customers/investors. Please note, the fatwa is silent on the definition of “clear benefit” and therefore, it opens for further interpretation by the market players and customers/investors.
3. Crypto assets include any type of cryptocurrency and other digital assets based on distributed ledger technology.
4. The assessment is made using the analytical hierarchy process (AHP). As a general background, the AHP is a method for organizing and analysing complex decisions, using various variables. This process provides a rational framework for a decision by quantifying its requirements and alternative options, and for relating those elements to the overall objective. In this case, BAPPEBTI uses variables such as: (a) the market cap of the crypto asset, (b) the use of the crypto asset in the market worldwide; and (c) the economic benefit for the crypto asset; and (d) the risk assessment related to money laundering and terrorist financing.
5. Regulation 8/2021 is silent on how this fit and proper test is conducted by BAPPEBTI and we expect that there will be a clear guidance issued by BAPPEBTI for the process as what has been done by the OJK by issuing a fit and proper test guideline for the management of banks and financial institutions. On a related note, we understand that BAPPEBTI is currently conducting a fit and proper test for the members of the board of directors and the board of commissioners of the futures exchanges for crypto assets.</sub></sup>