Co-regulating the Indonesian Digital Economy

Executive Summary The Gross Merchandise Value of the Indonesian digital economy has been growing at an annual rate of over 40% since 2015 and is predicted to reach USD 130 billion by 2025. This makes Indonesia the most promising digital market among its geographic neighbors. To facilitate further growth of the digital economy, the government must ensure the safety of the digital ecosystem for its users while providing an environment conducive to innovation. The government should pursue these goals by focusing on four policy areas: consumer protection, data privacy, cybersecurity, and e-payments. These areas are important due to the existence of regulatory deficiencies that if resolved, would accelerate the inclusive development of Indonesia’s digital economy. Although they are treated separately, at times these areas overlap and impact the nation’s digital economy environment. The existing consumer protection regulatory framework cannot accommodate emerging business models and instead imposes potential barriers to doing business; for example, in the form of licensing requirements for online sellers. Increasingly frequent data breaches and cyberattacks have highlighted the importance of data privacy and cybersecurity; yet here, too, the regulatory framework is incomplete and important bills are still being deliberated. The regulatory framework of e-payments is more advanced. In this area, the Indonesian government has established a clear policy blueprint and more innovative regulatory approaches, including a regulatory sandbox. The central bank of Indonesia (BI) and the Indonesian government’s financial services industry regulator (OJK) maintain a continuous dialogue with businesses, which creates and maintains a regulatory environment conducive to innovation. However, problems with e-payments remain in the areas of cybersecurity and data privacy. To regulate these areas of the digital economy effectively, a process of co-regulation is required. Co-regulation is a regulatory approach that emphasizes responsibility-sharing between state and non-state actors such as broad-based private sector stakeholders in policymaking and enforcement. It focuses on collaboration in the creation, adoption, enforcement, and evolution of policies and regulations. It is helpful for regulating the digital economy because it may provide the state with necessary data and knowledge, a mechanism for dialogue and flexible adaptation of legislative solutions in the new and fast-changing digital economy, and facilitate regulatory enforcement. To implement co-regulation, a Public-Private Dialogue (PPD) process needs to be established. The PPD needs to include the key stakeholders, such as government officials, business associations, civil society organizations, academia, and provide sufficient time for the process. Government actors should consider digital tools for collecting public input and to allow businesses to submit a regulatory impact assessment during a regulation’s lifetime. A formal process for sharing responsibility between public and private sectors must also be established. Involving businesses in the regulatory process, for example when testing new policies, helps ensure regulations remain enforceable without stifling innovative processes. The flexibility of this process allows regulators to accommodate the rapid changes of digital technology. A regulatory sandbox is a practical and positive example of such a process. It provides a policy innovation space for policymakers and businesses to engage in ideation, iteration, and experimentation within temporary, flexible regulatory, or legal frameworks. Finally, a monitoring and evaluation mechanism is needed to periodically review the co-regulation process and ensure that all lessons learned are on-the-record and transparent. This paper is divided into four sections. Section one highlights the landscape of the Indonesian digital economy, section two describes approaches in regulating the digital economy, and section three explores regulatory challenges. In the end, the paper presents ways to improve the regulatory framework of Indonesia’s digital economy