Overview of SEA giant Indonesia's crypto market
First look at Indonesia's national crypto exchange launch
TL;DR
Indonesia recently announced the launch of a state-run cryptocurrency exchange, raising hopes that it will become the new crypto hub of Southeast Asia.
Indonesia's state-run exchange is expected to operate more like a "stock exchange" than the crypto exchanges we're used to such as Binance.
The state-run exchange is expected to provide a safe market environment for cryptocurrencies, and huge investment capital is expected to flow in.
Introduction
In a bold stride towards becoming a regional hub in Southeast Asia's blockchain market, the Indonesian government recently announced the imminent launch of its state-owned cryptocurrency exchange. Revealing a concrete timeline, with an end-of-July deadline this year, the government declared that the world's first state-run cryptocurrency exchange will soon become a reality.
Although other nations such as Russia1 and China2 have expressed similar intentions, most have either entirely withdrawn or are currently reorganizing their plans. Indonesia's unequivocal declaration, in the absence of any reliable precedent for state-run exchange operation, attests to its resolute commitment towards the virtual asset market.
A Timeline of Indonesia's Virtual Asset Market
Just like Vietnam and other Southeast Asian countries, the Bank of Indonesia refuses to permit the use of cryptocurrency as a payment method, primarily fearing a depreciation of their national currency. This caution is rooted in their experience with the severe inflation that followed the 1997 East Asian financial crisis. Indonesia is sensitive not only about cryptocurrencies but also about its overall currency policy. For instance, any foreign exchange transaction3 or cash receipt4 exceeding a certain amount necessitates direct proof to the central bank, demonstrating their thorough efforts to protect the value of their currency.
However, recognizing that 1) blockchain technology and cryptocurrencies can enhance their financial services and 2) these sectors have the potential for explosive growth as high-value industries, Indonesia has been actively investing in various initiatives. Starting from 2019, the Indonesia Commodity Futures Trading Regulatory Agency (BAPPEBTI) initiated the drafting of regulations concerning virtual assets. Following this, companies began obtaining licenses one by one to operate in the virtual asset market, with a total of 30 businesses currently licensed.
Furthermore, the government has officially published a list of cryptocurrencies that can be traded within the country, thereby sending a message that these assets or commodities as being safely traded under government supervision. This move led to a surge of investors entering the cryptocurrency market. In fact, the number of cryptocurrency users in the country has soared from about 6 million in 2020 to approximately 18 million as of July 2023 — a nearly threefold increase.
The cryptocurrency trading volume has also significantly risen, with the recent monthly cryptocurrency trading volume in Indonesia reaching a staggering 8.2 trillion rupiah (approximately $0.6 billion). This accounts for nearly 35% of the total trading volume on the Indonesian stock exchange, illustrating its substantial scale.
December 2017, Indonesia's central bank banned the use of cryptocurrencies as payment for goods and services.
February 2019, BAPPEBTI established institutional regulations for cryptocurrency market operations (BAPPEBTI Reg. No.9/2019)
November 2019, Indonesian cryptocurrency exchange ‘TokoCrypto’ becomes the first to receive BAPPEBTI approval
December 2020, cryptocurrencies are restricted to government-designated exchanges in Indonesia and a list of 229 cryptocurrencies is released (including Bitcoin, Ethereum, etc.) that can be traded in Indonesia (BAPPEBTI Reg. No7/2020).
February 2021, 68 exchange sites, including Binance, were shut down and made inaccessible in Indonesia after unauthorized cryptocurrency exchanges were discovered.
May 2021, Bank of Indonesia officially announced the issuance of CBDCs on its social media accounts.
October 2021, Announcement of Detailed Regulations for Cryptocurrency Exchange Operations (Minimum Capital, etc.) (BAPPEBTI Reg. No8/2021)
May 2022, the Indonesian government decided to impose VAT and income tax on cryptocurrency transactions.
November 2022, a list of 383 cryptocurrencies that can be traded in Indonesia (including new ones like Klaytn and Solana) was released (BAPPEBTI Reg. No11/2022).
December 2022, following the passing of the P2SK bill in Indonesia, cryptocurrency regulatory authority will be transferred from the Commodity Futures Trading Authority ("CoFTRA") to the Office of the Financial Supervisor ("OJK") (with a grace period of approximately two years expected to avoid disruption).
June 2023, a list of 501 cryptocurrencies that can be traded in Indonesia (including new ones such as Aptos and Sui) was published (BAPPEBTI Reg. No4/2023).
July 2023, Indonesia's national cryptocurrency exchange launch is announced.
Indonesia to strengthen regulations with the launch of a state-run exchange
Despite a rather swift assimilation of the virtual asset market into its regulatory sphere, Indonesia's regulatory framework is perceived as relatively lax compared to other countries. For instance, although the Indonesian government released a list of tradable cryptocurrencies within the country, there were no specific sanctions or prohibitions regarding Initial Coin Offerings (ICOs). Consequently, issues such as crypto scams and poorly managed crypto projects started to emerge, increasing retail investor losses.
However, these issues are expected to be resolved with the launch of a centralized, government-led exchange at the end of July. Unlike typical exchanges such as Binance, Indonesia's state-run exchange is anticipated to operate similarly to traditional stock exchanges like the KRX and Nasdaq. Furthermore, exchanges like Binance are likely to support trading using the state-run exchange's system, similar to securities firms in the traditional stock market structure.
The significance of launching a state-owned exchange
The state-owned exchange signifies Indonesia's intent to limit the trading of all cryptocurrencies within the country exclusively through this exchange, thereby bringing crypto trading under the control of the central government. Such government-led operation is expected to yield several benefits: 1) stable trading with minimal external market interference, 2) high transparency through joint operation by Indonesian government agencies including OJK, the Central Bank, and the Ministry of Finance, and 3) enhanced liquidity since all domestic cryptocurrencies will be traded centrally.
This is expected to protect investors from the high risks inherent in the volatile virtual asset market, minimizing incidents such as the liquidity crisis of FTX and the confusion caused by frequent listing and delisting.
Conclusion
As the fourth most populous country in the world, Indonesia, often referred to as the giant of Southeast Asia, holds great potential for growth. The country's fervor for virtual assets is evident, with 41% of Indonesians holding cryptocurrencies5 and the government recognizing the blockchain industry as a new growth engine. The launch of a state-run crypto exchange strengthens Indonesia's ambition in the sector, stoking expectations that it may become a new virtual asset hub in Southeast Asia.
However, with the passage of the P2SK bill in Indonesia in December last year, it is increasingly likely that cryptocurrencies will be classified as securities rather than commodities. This means that the issuance and trading of cryptocurrencies will be subject to securities laws, which could lead to stricter regulations in the future. However, since cryptocurrencies are emerging as an important source of tax revenue for Indonesia, it is expected that regulations will be applied without disrupting the market atmosphere.
China announced plans to launch a state-run digital asset exchange in December 2022, and even went as far as launching it, but it's now confirmed that the service has been suspended and reorganized.
Proof of Real Demand for Foreign Currency Transactions. The Central Bank of Indonesia implemented a "proof of real demand" system in December 2008 to limit foreign currency purchases by banks to the equivalent of $100,000 per person per month to stabilize the value of the rupiah and prevent speculative trading.
Cash transaction reporting system, requiring proof of receipts of Rp 500 million or more.
Crypto Ownership by Country, Source: Gemini 2022 state of crypto global