Striking a balance between technology advancement and regulatory requirements

The new Law on the development and strengthening of the financial sector represents a major milestone for businesses in Indonesia.

Yosea Iskandar

Yosea Iskandar

The Jakarta Post


Surging profit: A woman makes a transaction using an automated teller machine in Jakarta on Saturday. Amid a challenging business environment, private lender Bank Mega booked Rp 2.2 trillion (US$155.26 million) in profit-before-tax as of September, up 27.7 percent year on year.(JP/Wendra Ajistyatama)

February 13, 2023

JAKARTA – The new Law No. 4/2023 on the development and strengthening of the financial sector represents a major milestone for businesses in the financial service sector and the advancement of information technology in Indonesia, particularly through the introduction of the smart contract as a form of electronic contract.

While some countries may have established a framework for the regulation of smart contracts, the application can vary, making it a complex and constantly evolving area. It is crucial that the implementation of smart contracts in Indonesia be thoroughly planned and executed to align with the current regulation and ensure consumer protection.

Smart contracts differ from traditional contracts in that they are not necessarily agreements between individuals or organizations. Instead, smart contracts refer to computer programs that operate on a blockchain and automatically execute when particular conditions are fulfilled.

Ethereum, a widely adopted blockchain network, provides a framework for the development and implementation of smart contracts. According to, a smart contract is a collection of code (its functions) and data (its state) that resides at a specific address on the blockchain. Further, smart contracts can define rules, like a regular contract, and automatically enforce them via the code.

This technology allows individuals or businesses to conduct transactions by embedding the terms of their agreement directly into the code, eliminating the need for intermediaries and making the process transparent, immutable and secure. The code, rather than human interpretation, determines the outcome of the agreement, ensuring that it is executed exactly as specified.

The law allows for the use of smart contracts in the capital market, money market and foreign exchange market transactions, including derivative instruments, as long as an accompanying agreement is preserved. The smart contracts must be based on this agreement, which, at a minimum, contains the terms and conditions for automating the execution of rights and obligations.

Hence, smart contracts cannot operate alone but must be supported by a natural language agreement for proper implementation of rights and obligations through programming language or code in the smart contract.

It suggests that the law mandates the establishment of a hybrid contract that combines elements of both traditional contracts and smart contracts. A hybrid contract can take advantage of the strengths of both types of contracts, offering the security and automated execution capabilities of a smart contract, while also allowing for the adaptability and customization of traditional contracts. The design and specifications of a hybrid contract will depend on the specific requirements and objectives of the parties involved.

The law further states that the regulations regarding smart contracts shall refer to further guidelines set by the Financial Services Authority (OJK) while taking into consideration the laws and regulations regarding electronic information and transactions.

Government Regulation (PP) No. 71/2019 on the implementation of electronic systems and transactions outlines the regulations concerning electronic information and transactions. This regulation stipulates that an electronic contract must encompass the parties’ identities, the object and specifications of the transaction, the price and associated costs. Additionally, it must include the procedures for cancelation, remedies for defects and the applicable law.

However, incorporating all of these elements into a smart contract presents a challenge for businesses.

The complexity of such a contract will likely lead to increased effort and higher creation costs.

The OJK Regulation on consumer and general public protection in the financial sector also imposes critical considerations in the development of smart contracts. Adherence to this regulation necessitates that businesses furnish consumers with transparent, accurate and easily comprehensible information regarding their products and services. To fulfill this obligation, all written material must be presented in the Indonesian language and written in a manner that can be easily understood by consumers.

While the utilization of natural language in hybrid contracts may align with these regulatory mandates, the regulation also requires the use of clear and legible symbols, writing, letters, diagrams and signs within the contract documentation.

Should there be any provisions within the contracts that pose a challenge for consumers to comprehend, businesses are obliged to provide additional clarifications. This added responsibility requires businesses to allocate more resources and efforts to explain the intricate computer code used in the smart contracts.

Another regulation for banks to consider is the OJK Regulation concerning information technology implementation by commercial banks. This regulation mandates that banks must host their electronic systems, including data centers and disaster recovery centers, within the territorial jurisdiction of Indonesia. In exceptional cases, banks may request the OJK approval to locate these systems outside the country.

However, further clarification might be required if this regulation may or may not extend to smart contracts, which operate on decentralized networks and not on centralized servers. The definition of a smart contract provided by the law is an electronic contract that is specified in a digital form and executed on a platform utilizing computer protocols. In line with this definition, the Law recognizes smart contracts as being executed on specific platforms, including distributed ledger technology.

Therefore, to meet these regulatory requirements, banks might have to consider employing a hybrid approach that incorporates both onshore and offshore components.

The onshore components of this approach include the maintenance of the data center and data recovery center within the jurisdiction, ensuring compliance with the information and technology implementation regulation.

The offshore components involve utilizing cloud-based infrastructure for specific components of the technology stack, such as the smart contract platform.

This combination of onshore and offshore components allows banks to benefit from the advantages of smart contracts while also meeting regulatory requirements.

The advancement of technology and the use of smart contracts have the potential to transform our financial service sector by increasing efficiency and reducing the need for intermediaries.

However, there are both technology and regulatory challenges that must be addressed before smart contracts can be fully implemented.

Hence, all relevant stakeholders must collaborate to strike a balance between technological advancement and further implementing regulation to best seize the opportunities offered by the new financial law.

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