1. Introduction

Following the issuance of Minister of Trade Regulation No. 99 of 2018[1] in September, which officially permits futures trading of crypto assets in Indonesia for the first time, the Commodity Futures Trading Supervisory Authority (“Bappebti”) issued Bappebti Regulation No. 5 of 2019 (“Reg. 5”)[2] on Feb 8 to provide a detailed regulatory framework for the operation of the physical crypto-asset futures market.

While Reg. 5 deals specifically with futures trading of crypto assets, it needs to be read in conjunction with Bappebti Regulation No. 2 of 2019 (“Reg. 2”),[3] dated 4 February 2019, which establishes an amended regulatory framework for commodity futures trading in general.

It should be noted that the use of a crypto assets in the form of cryptocurrencies as payment instruments continues to be prohibited by Bank Indonesia.

2. Definitions

Reg. 5 defines a “Crypto Asset” as “an intangible commodity in the form of a digital asset that uses cryptography, a peer-to-peer network and distributed-ledger technology to regulate the creation of new units, verify transactions and ensure transaction security without the involvement of a third party intermediary.”

The key players involved in the physical crypto-asset futures market are Bappebti (a government agency under the Ministry of Trade that regulates futures trading), Crypto-asset Exchanges, Crypto-asset Clearing Agencies, Crypto-asset Traders (“Trader”), Crypto Asset Clients (“Client”), and Crypto Asset Storage Providers.

A Trader is defined as a “party that has been approved by Bappebti to conduct crypto-asset transactions on its own behalf and/or to facilitate crypto-asset transactions by Clients,” while a Client is defined as “a party that uses the services of a Trader to buy and sell crypto assets on the crypto-assets market.”

3. Reg. 5: Key Provisions

3.1. Crypto Asset

Reg. 5 expressly excludes initial coin offerings from the scope of its regulatory scheme.

A crypto asset may only be traded on a Crypto-asset Exchange if the crypto asset is approved by Bappebti and listed in Bappebti’s Schedule of Crypto Assets.

To be approved by Bappebti, a crypto asset must, at a minimum, satisfy the following requirements:

a. employs distributed ledger technology;

b. is asset backed or utility-based;

c. in the case of a utility-based crypto asset, the crypto asset must be among the top 500 in terms of market capitalization;

d. it must be traded on the largest crypto asset exchange in the world;

e. offers economic benefit; and

f. has successfully passed a risk assessment, including as regards the anti-money laundering and combating the financing of terrorism and proliferation of weapons of mass destruction regulations.

3.2. Crypto-asset Exchange

Only those Crypto-asset Exchanges that have been approved by Bappebti may engage in the trading of crypto assets.

In addition to complying with the general requirements set out in Reg. 2 and other subsidiary legislation, a Crypto-asset Exchange must also satisfy the following requirements:

a. paid-up capital of at least IDR 1.5 trillion (USD 106,330,500);

b. maintains a closing capital balance (saldo modal akhir) of at least IDR 1.2 trillion (IDR 85,064,400);

c. has a minimum of three employees who are Certified Information System Security Professionals (CISSP).

3.3. Crypto-asset Clearing Agency

Clearing and settlement of crypto-asset trades may only be conducted by a Crypto-asset Clearing Agency that is approved by Bappebti. In addition to complying with the general requirements set out In Reg. 2 and other subsidiary legislation, a Crypto-asset Clearing Agency must satisfy the following financial requirements:

a. minimum paid-up capital of IDR 1.5 trillion (USD 106,330,500); and

b. maintains a closing capital balance of at least IDR 1.2 trillion (IDR 85,064,400).

3.4. Crypto Asset Trader

A Trader must be incorporated as a limited liability company, be a member of a Crypto-asset Exchange and a Crypto-asset Clearing Agency, be designated as a Trader by the Crypto-asset Exchange and be approved by Bappebti. Separate Bappebti approvals are required for each type of transaction mechanism that is employed by the Trader. In addition, every such mechanism must be governed by trading rules that are approved by Bappebti.

A Trader may only be a member of one Crypto-asset Exchange and one Crypto-asset Clearing Agency.

In addition to complying with the general requirements set out in Reg. 2 and other subsidiary legislation, a Trader must also satisfy the following financial requirements:

a. minimum paid-up capital of IDR 1 trillion (USD 70,846,500);

b. maintains a minimum closing capital balance of IDR 800 billion (USD 56,677,200).

Further, a Trader must have an organizational structure that, at a minimum, consists of an IT division, audit division, legal division, client-complaints division, client-support division and finance division.

Reg. 5 also sets out a detailed list of technical requirements for Traders, including having ISO 27001 (Information Security Management System) certification. In addition, Traders that avail of Cloud storage must have ISO 27017 (cloud security) and ISO 27018 (cloud privacy) certification.

A Trader’s online trading system must be audited by a certified and competent independent agency before being approved by Bappebti. Should a Trader’s system be found to be incompatible with the systems used by the Crypto-asset Exchange and/or the Crypto-asset Clearing Agency, and/or fail to comply with the specifications/standards that they stipulate, the necessary changes must be made by the Trader within 3 months of the finding of incompatibility or non-compliance.

A Trader is accountable for the crypto assets that it manages.

3.5. Crypto-asset Storage Provider

A Crypto-asset Storage Provider must be approved by Bappebti based on a recommendation from a Crypto-asset Exchange. A Trader may act as a Crypto-asset Storage Provider based on a separate approval from Bappebti. In such circumstances, the Trader’s storage system must also be approved by Bappebti based on a recommendation from the Crypto-asset Exchange.

Besides complying with the general requirements set out in Reg. 2 and other subsidiary legislation, and the detailed technical requirements established by Reg. 5 (including ISO 27001 certification), a Crypto-asset Storage Provider must also satisfy the following financial requirements:

a. minimum paid-up capital of IDR 1 trillion (USD 70,846,500);

b. maintains a minimum closing balance of IDR 800 billion (USD 56,677,200).

In addition, a Crypto-asset Storage Provider must have an organizational structure that consists of, at a minimum, an IT division, audit division and legal division.

A Crypto-asset Storage Provider’s online storage system must be audited by a certified and competent independent agency before being approved by Bappebti. Should the system be found to be incompatible with the system used by the Crypto-asset Exchange and/or the Crypto-asset Clearing Agency, and/or fail to comply with the specifications/standards stipulated by them, the necessary changes must be made within 3 months of the finding of incompatibility or non-compliance.

A Storage Provider is accountable for the crypto assets that it manages.

4. General Provisions Related to Crypto-Asset Trading Operations

Before opening a Client account and accepting funds from a Client, a Trader must provide the Client with information on the Trader’s corporate particulars, the risks involved in crypto-asset trading (including those related to price fluctuation and system failure), and enter into a contract with the Client. Traders are also required to apply Know Your Customer (KYC) in respect of the money laundering, terrorist financing and the financing of proliferation of weapons of mass destruction regulations. All suspicious transactions must be reported to the Financial-Transaction Analysis and Reporting Center (PPATK).

A Trader is required to keep a minimum of 70 percent of the total crypto assets that it manages in “cold storage” (that is, in physical paper form). This may be undertaken (a) in collaboration with a Crypto-asset Storage Provider that provides token or wallet storage services: or (b) by the Trader itself, using a token or wallet storage mechanism.

Every Client transaction that is facilitated by a Trader must be verified by the Crypto-asset Clearing Agency, and reported to the Crypto-asset Exchange for the purposes of setting price references and conducting supervision.

5. Transitional Provisions

The requirement for a Trader to be approved by Bappebti comes into effect one year after the date of issuance of Reg. 5. In the interim, existing Traders may continue to operate provided they register with Bappebti. To register, an existing Trader must:

(a) have a minimum paid-up capital of IDR 100 billion (USD 7,070,600); and

(b) maintain a minimum closing balance of IDR 80 billion (USD 5,656,480).

By the end of the one-year period, the Trader must have fulfilled the financial requirements set out in Reg. 5, i.e., have a minimum paid-up capital of IDR 1 trillion and a minimum closing capital balance of IDR 800 billion. A failure to comply with these requirements will result in the revocation of the Trader’s registration, in which circumstances the Trader will be obligated to (a) assign all of its accounts to another registered or approved Trader, or (b) return the funds and/or crypto assets it manages to its Clients.

6. ABNR Commentary

While market players have broadly welcomed the general scheme established by Reg. 5, they have nevertheless questioned the high financial thresholds it imposes in the form of minimum paid-up capital and minimum closing-balance requirements for Crypto-asset Exchanges, Clearing Agencies, Storage Providers and Traders. They argue that these financial requirements fail to take into account the industry’s current stage of development in Indonesia and thus have the potential to stymie its growth going ahead. They also complain that the financial requirements came as a surprise as they had not been discussed during in the industry consultations conducted by Bappebti prior to the issuance of Reg. 5. In response, the Head of Bappebti, Indrasari Wisnu Wardhana, has stated that the thresholds have been set having regard to projected trading volumes. Strong capitalization is essential, she said, so as to ensure financial accountability and promote market confidence.