Indonesia has recently been following in the footsteps of its close neighbour and business partner, Singapore, in exploring the use of blockchain technology. 

Central Bank Digital Currency (CBDC) and Cryptocurrency regulation

The country’s Central Bank, Bank Indonesia, has been considering the issuing of a digital rupiah, the national fiat currency. It is conducting a two-year study assessing the impact a CBDC would have, such as lower operational and transaction costs, especially in remote areas where the distribution of physical money is burdened by infrastructure troubles. The study is expected to be concluded in 2020 and will include an examination of the currency’s implications, impacts, procedures, consumer protection, legality, and technology.

The country has taken a mixed approach towards cryptocurrencies such as Bitcoin, Ethereum, Dash, Litecoin and Ripple, which are banned as domestic payment instruments under the Bank Indonesia Regulation No. 18/40/PBI/2016 on the Implementation of Payment Transaction Processing (November 2016). However, Indonesia’s Commodity Futures Trading Regulatory Agency (known as Bappedti) has approved regulation No. 5/2019 (February 2019) which does recognise Bitcoin and other cryptocurrencies as trading commodities, giving legal certainty to cryptocurrency exchanges that have been already operating in the country. The law imposes AML/CFT requirements on virtual asset service providers. 

Pilot project on the transfer of liquid propane gas (LPG) 

In terms of blockchain use cases, in September 2018 the Blockchain software company Everest partnered with the Indonesian National Team for the Acceleration of Poverty Reduction (TNP2K) in the office of the Vice President of the Government of Indonesia to conduct a pilot that aimed to facilitate the transfer of liquid propane gas (LPG) subsidies by delivering them to a biometrically validated digital wallet over a transparent and low cost blockchain. The goal of the pilot was to modernise delivery, reduce financial leakage, and enable banking services through financial inclusion. Addressing the current problems of delivery inefficiencies and lack of transparency will provide economically disadvantaged individuals greater access to energy subsidies.

Batam Indonesia Free Zone Authority (BIFZA)

Key to Indonesia’s policy of promoting domestic blockchain solutions is the Batam Indonesia Free Zone Authority (BIFZA). Batam is one of the 3,000 islands which make up the Riau Archipelago and is closest to Singapore, which is just 20 km or a 45-minute ferry ride away. Its strategic location is complemented by its investor-friendly environment. Operating here comes with a multitude of cost-competitive advantages that includes space availability, steady labour supply and strong government support. The island is also home to modern, well-developed infrastructure that keeps businesses running smoothly.

Designed with investors in mind, Batam Island offers quality industrial space with a complete manufacturing environment. An integrated industrial township concept with full infrastructure, the Park provides industrial vacant plots and ready-built factories including professionally-managed utilities as well as an efficient one-stop business centre to assist investors in getting the necessary permits and licenses to set up facilities and operations within the park. It therefore comes as no surprise that blockchain-based innovations are already appearing in the region:

  • Memorandum of understanding of the Collaborative Joint Blockchain Logistics Pilot Project (May 2019): Singapore-based blockchain firm PLMP Fintech Ltd., and PT Central Distribusi Batam have agreed to participate in a multi-million dollar logistics project in partnership with the Indonesian Government, following the signing of the MoU. The pilot stage will include the deployment of PLMP Fintech’ own blockchain protocol in order to unify the standards of communications between buyers and sellers of agricultural commodities in Batam Island. Smart Contracts intend to provide a higher level of time and cost efficiencies by enabling instant updates on the exact location of moving good.
  • Public Healthcare Blockchain (“PHB”) (May 2019): dClinic is developing a Public Healthcare Blockchain (“PHB”), a private healthcare blockchain leveraging data analytics tools supplied by world class partnering companies. The PHB will be implemented at a secure data centre in Batam operated by BP Batam Authority and dClinic. Several observers from the Indonesian Government are following this project carefully with the aim of eventually deploying a successful solution across the whole of Indonesia. dClinic will be implementing its PHB with the central goal of proving its effectiveness for providing a secure, dependable and flexible Longitudinal Electronic Health Record (“LEHR”) for patients and consumers.

Interview with Hilman Palaon, Financial Inclusion and Government to Person (G2P) Payment Specialist, Secretariat of Vice President Republic Indonesia

Regulation

Has Indonesia introduced any specific regulations or initiatives to deal with blockchain/DLT?

There are no blockchain-specific regulation in Indonesia. However, some umbrella regulations may affect blockchain initiatives. For example, the Presidential Decree 95 of October 2018 is related to improving electronic-based government systems. The Decree introduces the potential use of new technologies, such as mobile internet, IoT, AI, cloud computing and big data analytics. Although blockchain is not mentioned, it is likely to be brought in scope once its use becomes more widespread.

Do you find the Indonesian regulatory framework is ready for blockchain technology, or do you need to amend existing reg or make specific one?

Currently, the Indonesian government is open to the private sector for introducing and conducting blockchain-based pilots or limited implementation. We will then review and assess these developments from a cost analysis, audit and security perspective. Indonesia tends to use the sandbox approach for new innovations. Separate regulatory bodies have different sandbox, which the relevant company can go to in order to test new solutions.

Is there one particular Indonesian Minister appointed to lead on this issue? Would that be a good idea?

For blockchain, it depends on the sector affected, whether it is financial, health, customs or other. In the earlier mentioned Presidential Decree 95, it is also stated that the Indonesian Government will put in place a team led by the Minister of Administrative and Bureaucratic reform. The members include the Ministry of Home Affairs, Ministry of Finance, Ministry of ICT, Cybersecurity and technical assessment institutions. These entities are responsible for developing the initial platform for the electronic-based government systems.

Wider adoption / Use cases

What do you consider to be key factors in successfully implementing widespread blockchain/DLT adoption?

  • Political will;
  • Knowledge and understanding of what the technology can solve;
  • Readiness of the infrastructure, such as digital connectivity. As Indonesia is formed of more than 17 thousand islands, there are still many locations remain ‘blank spots’ with little to no internet access. This is a serious challenge for widespread blockchain adoption. In order to mitigate this, the government keep trying to improve access connectivity in collaboration with telecommunications companies and requesting service providers to offer offline solutions.

Which specific use cases/applications are being implemented in the Indonesian’s public sector? What benefits have been seen so far, if any?

From my current position under the Vice President Office, we are working on reforming the G2P disbursement programs. During the pilot LPG in 2019, we used biometric data and financial transaction for beneficiaries of government assistance program. This was implemented with blockchain technology. More than 5,000 beneficiaries were involved. There were two types of chain: the ID chain and the financial transaction chain. The ID chain was the smart contract for all the ID recorded and tested the use of biometric technology on the blockchain. The transactions chain was relative to the amount of money the beneficiaries received during the project. It was a successful pilot project as most of the stakeholders, such as the Ministers, saw the potential for this kind of solution.

We are also preparing the next implementation phase for 2020. Gradually, in stages, we will develop the stages of how we can incorporate the new technology in the policy reforms for G2P programs. The plan is to adapt the biometric technology to blockchain. This would be much more efficient than the current system. The way benefits are currently disbursed is through a debit card mechanism. However, due to financial illiteracy, there are issues of fraud and confusion around the use of these cards. So the Indonesian government aims to improve this mechanism by directly targeting beneficiaries via biometrics and blockchain.

In terms of the benefits of this pilot becoming the norm, we consider that if we only have one single distributed database, we can significantly reduce costs. It will be easier for the government and the beneficiaries, to do the transaction and update the data. Currently, updating the data is very cumbersome as a government official needs to go directly to the beneficiary’s home. It is still done manually with pen and paper, which is then put on a computer and then sent to the relevant government authority to be updated. This could be done much more efficiently via blockchain technology, and beneficiaries can be responsible for updating their own data, using a specific smartphone application.

The Ministry of Economic Affairs is also looking to stimulate international service providers by opening up one of Indonesia’s provinces, Batam Island, also known as the Batam Digital Economic Zone. Any blockchain initiative can be implemented in this region. As of June 2019, one initiative has been launched related to the health sector in a hospital. The Central Government is set to assess any success stories arising out of the zone and learn from these new experiences.

Challenges

Do you see any major political challenges preventing wider adoption?

The political will for introducing and implementing new technologies is the main challenge in Indonesia.

It starts from the highest officials in government and how we can raise their knowledge and understanding of these new solutions. Many have only heard of blockchain technology in the context of fraudulent and controversial cryptocurrencies. We need them to understand that blockchain is about more than just cryptocurrencies. It could apply to many different government services.

Further there is a silo-type of culture among the Indonesian Ministries and Institutions. We would like to have more integration and standardisation of the different databases across the Departments.

Ethical or sharia-related concerns around the use of blockchain?

In terms of ethical concerns, the ownership of population data is under the supervision of the Ministry of Home Affairs. Ethical concerns from the consumers are therefore very low.

In terms of cultural challenges, as Indonesia is primarily a muslim country, we found during the pilot that women wearing the hijab proved a challenge to the biometric checks. This is a technical challenge as the facial recognition scanner struggled to recognise this part of the community.

The Future

What is the plan in the short to medium term (next 5 years)? How do you see the space evolving in the next 5 years? How would you like the space to evolve?

Indonesian has just finished its election process. In October 2019, we will have a new Cabinet and our plan is to push the new technologies agenda (including blockchain) into the country’s next five year plan. Every five years, Indonesia goes through the National Medium-Term Development Plan, the next one being from 2020 to 2024. Part of the agenda is also to finalise the electronic-based government system platform. Under this platform, we will have a strategic plan for general guidelines and roadmap for each government institutions. From an implementation perspective, we are open to the private sector coming up with blockchain-related initiatives in order to show the government how the technology works and can be applied as a solution. We would also like to promote pilot-based initiatives at the government level.

Relation with other countries

What lessons or transferable experiences can you share to help other countries follow your lead?

The most important lesson we learned is the need to introduce reforms and new initiatives in the country. We would like to share with other countries evidence of blockchain-based solutions. This is done by conducting the pilot projects and introducing implementation plans. We also have informal discussion with other governments in the region such as Singapore and Australia. We have committed to collaborate with these jurisdictions on blockchain developments, such as in FinTech and several other sectors.