Indonesia opens doors to blockchain market with sandbox regulations
What opportunities are there for the Indonesian market?
TL;DR
The Indonesian government has introduced a financial sandbox regime covering blockchain technology and cryptocurrencies to foster innovative financial services.
It has improved the previously unclear regulatory environment and transferred oversight of cryptocurrencies to the OJK to strengthen the link with traditional finance.
The use of blockchain technology is expected to expand in various fields such as staking, stablecoins, and RWA tokenization. Specialized services unique to Indonesia are also expected to emerge.
The Indonesian government recently launched a financial sandbox to promote innovation within the financial sector. A sandbox serves as a temporary license, enabling businesses that were previously constrained by regulations to operate freely within a controlled environment for the purpose of reforming existing industries.
This new sandbox is not limited to traditional finance but extends to blockchain technology and virtual assets, allowing blockchain-based financial services to operate within previously restricted regulatory frameworks. As the Indonesian government actively embraces the blockchain market, this report explores the opportunities emerging from these changes.
1. Previous Regulatory Environment in the Gray Zone
To understand how the new sandbox system will change the regulatory environment in Indonesia, we need to look at the past regulatory environment. Previously, Indonesia’s regulatory landscape for Web3 and blockchain was ambiguous, with many areas remaining undefined, making it difficult to ascertain the legality and feasibility of related business activities.
Currently, cryptocurrency exchanges are the most regulated aspect of this market, although guidelines for other services the exchanges may provide like staking and stablecoin issuance remain vague.
Despite this, many Indonesian exchanges currently offer cryptocurrency staking services. However, Reku appears to be the only Indonesian crypto exchange that has received official approval from the Commodities and Futures Trading Authority (BAPPEBTI) for its staking services.
In other words, there is a gray zone in the current regulatory framework where businesses are operating without approval. In this situation, the introduction of the financial sandbox system is expected to integrate previously unregulated sectors into the formal system, thereby clarifying the regulatory environment.
2. How did Indonesia start the sandbox?
The transition of cryptocurrency regulation from BAPPEBTI to the OJK (Financial Services Authority) is set to conclude by January 2025. This transition is viewed positively by the local industry, as OJK’s comprehensive oversight across traditional financial sectors promises a unified regulatory approach for cryptocurrencies.
Following this shift, the regulations for Financial Innovation Sandboxes have been updated to incorporate blockchain technology extensively within the financial sector. Continuous dialogue between blockchain market participants and regulators is anticipated to bring previously ambiguous activities like staking and stablecoin operations into the sandbox for testing.
3. Details of the Sandbox Regulation
More specifically, Indonesia's sandbox regulation is one item in the OJK's Regulation No. 3/2024on Technological Innovation in the Financial Sector (POJK 3/2024). The regulation extends beyond just sandbox trials to include financial education, investor protection, and more.
Financial institutions or new market entrants must demonstrate that their services offer innovative solutions that benefit Indonesian consumers and the broader financial ecosystem. Applicants must submit relevant documents to the OJK and, if selected, can test their services for one year. If they pass the evaluation at the end of the test, they will have six months to obtain a full license from OJK.
The sandbox regulation is scheduled to go into effect in June, so it is hard to determine the difficulty or the duration of the tests. However, as the OJK's Digital Asset Department will monitor the process, in-depth supervision of various services that apply blockchain technology is expected.
4. Emerging Opportunities in Indonesia’s Blockchain Market
4.1. Cryptocurrency Services in the Gray Zone
The sandbox is expected to legitimize and standardize services that previously operated under regulatory uncertainty. For instance, services such as staking and stablecoin issuance stand to benefit significantly from the improved clarity. The sandbox will likely establish guidelines that enable first movers in staking to capture significant market shares.
Similarly, stablecoins that demonstrate reliability in the sandbox could become integral to conventional financial operations like remittances and payments, facilitating broader integration of virtual assets into the real economy.
4.2. Combining Blockchain with Traditional Finance
The oversight transfer to the OJK is also an opportunity to meld blockchain technology with traditional financial services, particularly in the realm of Real-World Asset (RWA) tokenization. Indonesia's rich natural resources and real estate sectors present substantial opportunities for RWA market growth, potentially benefiting capital market development and overall economic expansion.
Regarding the oversight transfer, Tigran Adiwirya, D3Labs co-founder said, “The initiative by OJK to continue sandboxing for digital financial assets is a commendable move that can foster innovation in Indonesia’s financial sector. By providing a controlled environment for experimentation, startups and financial institutions can explore new technologies and business models without the fear of regulatory backlash. It encourages creativity and also ensures that regulatory frameworks keep pace with technological advancements. This initiative has the potential to democratize access to investments and unlock liquidity in traditionally illiquid markets. With OJK’s supportive stance, we can expect to see a wave of innovation that will eventually drive economic growth.”
4.3. Emerging Services
The introduction of the sandbox system is set to catalyze the development of innovative blockchain services that can address the specific needs of the Indonesian market. Indonesia grapples with a low level of financial inclusion, where the number of cryptocurrency exchange accounts surpasses that of traditional financial accounts. In this context, blockchain-enabled services such as instant remittances and microloans are anticipated to play a crucial role in integrating the financially excluded into the economy.
Moreover, considering Indonesia’s economic reliance on primary industries like agriculture and fisheries, there is a promising potential for the emergence of blockchain services tailored to these sectors. Additionally, the rise of companies offering financial services to gig workers illustrates another area where specialized blockchain solutions could significantly impact. These developments are expected to foster a more inclusive and efficient economic environment, leveraging blockchain technology to meet the diverse needs of Indonesia's economy.
5. Why you need to keep an eye on Indonesia
The implementation of the financial sandbox system by the Indonesian government is expected to be a springboard for the blockchain and cryptocurrency industry. The transfer of supervisory authority to OJK in particular will strengthen the link between crypto and traditional finance and solidify the institutional foundation. This initiative is expected to foster the development and commercialization of various blockchain services, enhancing innovation within Indonesia’s financial sector.
Indonesia's proactive regulatory approach could potentially set a new standard for cryptocurrency regulation globally. Observing Indonesia's journey could provide valuable insights into achieving a harmonious balance between regulation and innovation in the financial technology space.
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