Has the insurance industry anticipated possible drawbacks of digital currencies?

by Admin IFG Progress


5 January 2024

Authors: [1] Ibrahim Kholilul Rohman, [2] Afif Luviyanto


The rapid advancement of digital transformation has spurred the adoption of technology across various sectors, including the use of crypto assets and other digital currencies that might replicate traditional fiat money soon. This has led central banks worldwide, including Indonesia, to introduce Central Bank Digital Currency (CBDC) as a centralized digital currency concept, accommodating the changing behaviour of society. Bank Indonesia emphasizes that the digitalization of the economy has shifted people’s preferences towards financial services that are faster, easier, cheaper, more secure, and more reliable.

In Indonesia, under the Garuda initiative, Bank Indonesia is actively exploring the design of the Indonesian CBDC, known as the Digital Rupiah. This project complements Bank Indonesia’s various initiatives in promoting the national digital transformation agenda, specifically the integration of digital economy and finance in an end-to-end manner. These efforts are currently being advanced through the 2025 Indonesian Payment System Blueprint (BSPI 2025) and the 2025 Money Market Development Blueprint.

In a multilateral setting, Bank Indonesia is also engaged in initiatives during Indonesia’s ASEAN chairmanship in 2023 and in the G20 presidency in 2022 to promote CBDC in response to the widespread adoption of  the private digital currencies. This aligns with the spirit of the 2045 Advanced Indonesia Vision has prompted Bank Indonesia to reformulate its 2020-2025 Vision, aiming to become the leading digital central bank that makes a tangible contribution to the national economy and sets the benchmark among emerging market countries for developed Indonesia.

The implementation of CBDC will have an impact on the monetary and overall economic sectors. According to Bank Indonesia (2022), CBDC complements physical currency by enabling faster circulation and contributing to the funding needs of development. From a monetary policy perspective, the transmission of monetary policy will be accelerated, allowing policy actions to have a more significant impact on the real sector.

Regarding the impact of this policy on the financial sector, particularly the insurance industry, there are several aspects to consider. Firstly, Bank Indonesia may need to determine whether CBDC will bear interest rate or not. As a comparison, despite cryptocurrencies not yet being officially recognized as a means of payment, their high returns and rapid development, such as Bitcoin and Ethereum, have been noteworthy. Based on Bloomberg data, Bitcoin’s price increased from $3.4 per coin in mid-2011 to $25,848 per coin on June 12, 2023 (after declining from its peak of $62,941 in October 2021). Similarly, Ethereum’s price rose from $0.9 per coin in March 2016 to $1,738 per coin on June 12, 2023.

In addition, compared to other assets like stocks or gold, the Year-to-Date (YTD) return rate of certain crypto assets, such as Ethereum (45.43%), Bitcoin (56.56%), and Solana (58.33%), surpasses that of traditional assets. In contrast, returns from assets like the S&P 500 (12.81%) and gold (7.67%) have been lower. This may lead the central bank to consider issuing an interest-bearing CBDC to ensure market acceptance, assuming that CBDC and private cryptocurrencies are substitutes.

Secondly, as explained in the impact on the banking industry. Prior to CBDC implementation, the banking balance sheet consists of so called the High-Quality Liquid Assets (HQLA) such as cash, loans, and other assets, while the liabilities include deposits, wholesale funding, and capital. The introduction of CBDC may result in changes to the assets and liabilities sections of the balance sheet. On the assets side, the amount of High-Quality Liquid Assets (HQLA) might decrease due to the liquidity coverage ratio associated with CBDC.

Furthermore, based on the same study by the BIS (2021), the adoption of CBDCs could potentially prompt commercial banks to raise deposit rates. This is to prevent individuals from being more inclined to place their money in CBDCs as an alternative option. Consequently, to balance the bank’s balance sheet, lending rates may also increase, providing a buffer for the banking sector to compensate for the higher deposit returns offered to customers. suggest that higher interest rates on deposits could potentially lead to a decrease in loans, as financing becomes viable only for projects with a higher return on investment. Other studies such as Agur et al (2019) and Mancini-Griffoli et al (2018) note that this policy may be primarily implemented by large banks with a strong bargaining position. When deposit rates increase, these banks may be more willing to increase lending rates, thus reducing the amount of credit available. Consequently, Piazzesi and Schneider (2022) conclude that the implementation of CBDC could make the credit channel of the monetary policy transmission mechanism more expensive.

Thirdly, let’s examine the anticipated impact on the insurance industry. The decrease in loan disbursements resulting from CBDC implementation may directly impact the insurance industry, particularly in terms of reduced credit insurance premiums. In Indonesia, as studied by

Moreover, the proportion of credit insurance to general insurance in Indonesia is significantly larger compared to other countries in 2020. In Indonesia, credit insurance accounts for 15% of the total general insurance, while countries like the United States, Germany, France, Japan, China, and Singapore range around 5%.

Adding to this is the indirect effect that lower lending might potentially decline in bank credit, which would result in reduced in demand for general insurance, including coverage for property, motorbikes, and other areas. These aspects should be anticipated by the insurance industry.

This article was published in with the title “Insurance industry in the age of digital currency”. Click to read:

[1] Senior Research Associate of IFG Progress

[2] Research Associate of IFG Progress




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