In this open letter, two of Indonesia’s Bitcoin participants implore the Indonesian central bank to use the virtual currency to benefit the country.
Bitcoin and other virtual currencies pose a direct threat to the status of the US Dollar as a world reserve currency. As such, the Indonesia Rupiah and other emerging market currencies stand to benefit the most from the emergence of alternative reserve currencies.
Although policy affecting the US Dollar has international effects, the US Central Bank (Federal Reserve) implements monetary policy aimed exclusively for the benefit of the US economy. The mandate of the Federal Reserve is narrowly targeted to control inflation and promote growth in the United States. Side-effects to other countries are given little or no consideration and foreign complaints are frequently ignored.
During monetary expansion, when the Federal Reserve is concerned with growth in the US, emerging market currencies rapidly appreciate as a result of US Dollars inflows. In the end, emerging economies’ central banks need to intervene to prevent damaging appreciation of their currencies.
When the Federal Reserve sees threats of inflation in the US, it switches to a tightening policy which triggers abrupt outflows from emerging markets back into the US causing rapidly weakening currencies and increasing the threat of inflation. The net result is that US policy makers effectively export inflation out of the United States into other countries.
Bitcoin’s decentralized nature makes it immune to manipulation that would serve the interests of any individual country at the expense of other nations. The internal functioning mechanism of virtual currencies are open, transparent and policy is governed by mathematical principles making it a suitable candidate to play the role of a true reserve currency.
The benefits of virtual currencies go beyond isolating the Rupiah from the effects of external foreign policy. Exports, for example, benefit from the adoption of virtual currencies. The lower barrier that Bitcoin in accepting cross-border payments enables smaller companies to contribute to exports. This diversification gained makes the sector more resilient and reduces over-dependence on specific exports.
Improved tax collection is another area that will benefit Indonesia. Since a large proportion of the economy transacts in cash, there’s tax revenue leakage. Bitcoin, while retaining many of the characteristics of cash, is more traceable than cash.
Problems with Bitcoin, but they’re not dealbreakers
Bitcoin is not without its problems and challenges. The two most cited are the wild volatility and the use of Bitcoin as a vehicle for money laundering and other illegal activities. However, both problems are surmountable.
Regarding the issue of volatility, these are temporary traits of a young currencies with relatively low liquidity. As acceptance continues to spread and the currency matures the general expectation is that wild swings will be more rare.
It is important to realize that there is a wide misconception that Bitcoin is anonymous. This is simply incorrect as all Bitcoin transactions are publicly recorded. Only the identity of the transactions is not public but can be obtained with reasonable effort.
Cash will continue to be the preferred medium for criminal activity as it is harder to track.
With regards to money laundering using Bitcoin, this can be easily controlled simply by extending Know Your Customer and anti-money laundering laws to Bitcoin transactions.
Regulators should resist the temptation to take the easy route and simply ban Bitcoin transactions, which was the path taken by Thailand’s central bank with negative unintended results. It prevents legitimate businesses from its benefits, stifles local innovation in this space and worse, pushes Bitcoin transactions underground where is even harder to influence or regulate.
Germany showed more foresight. German financial regulators, by officially categorizing Bitcoin as a unit of accounting, gains more influence over Bitcoin development in the country and gets another source of tax revenue. Denmark has followed a similar path.
We are confident that Bank Indonesia can become equipped to properly regulate Bitcoin activity in Indonesia and gain influence in its development. The current indecisiveness among many regulators represents an opportunity for Bank Indonesia to set sensible laws that will allow it to continue to safeguard the Rupiah while giving Indonesian early adopters and startups an advantage over other countries that will inevitably join the new financial landscape being shaped by virtual currencies.
(Editing by Terence Lee and Josh Horwitz, image credit: Sean MacEntee)