HYBRID DIGITAL CURRENCY FILLS A NEED IN CAMBODIA
When Cambodia’s central bank launched a pilot for a digital payment system in July 2019, its aim was to increase financial inclusion in the country and expand use of the local currency over the US dollar. Then came the coronavirus pandemic.
For the National Bank of Cambodia (NBC), which had been researching a blockchain-based payment system since 2016, the pandemic was a boon that accelerated the adoption of Bakong, named for an ancient Khmer temple near Siem Reap.
Launched formally in October 2020, Bakong now provides a platform for more than a dozen banks and financial institutions. It has reached about 5.9 million users, with transactions worth nearly US$2 billion so far, according to the NBC.
The pandemic “was a blessing in disguise, as adoption was faster because people were worried about handling money”, said Chea Serey, the NBC director-general.
Worldwide, the pandemic quickened the growth of digital transactions, with corporations encouraging online payments and governments taking steps to increase financial inclusion for those who had been excluded due to poor connectivity, limited access to handsets or low literacy.
Bakong, developed by the Japanese blockchain company Soramitsu, enables Cambodians to use a free mobile app to make payments and transfer money through any bank on the platform, even if they don’t have a traditional account.
More than 200,000 previously unbanked Cambodians now use a Bakong e-wallet now, the NBC said.
Still, that is just a fraction of the more than 70% of the 17-million population estimated to be unbanked, who never or rarely use a bank.
“As a large share of the population is unbanked, creating a system that people without experience with banks could find intuitive took a lot of work,” said Makoto Takemiya, group chief executive of Soramitsu Holdings.
But mobile phone penetration is high, and the population is “mostly young and comfortable using mobile phones”, so adoption has been fairly quick, he told the Thomson Reuters Foundation.
Globally, the use of physical cash is falling, and authorities are looking to fend off the growing threat of cryptocurrencies which they say are highly volatile, and can increase systemic risks, promote crime and hurt investors.
A survey last year of 65 central banks by the Bank for International Settlements showed 86% were exploring or testing central bank digital currencies (CBDCs).
The Bahamas became the first country to launch a CBDC, the Sand Dollar, in October 2020, while Nigeria was the first African nation to launch a digital currency — the eNaira, in October 2021. Bakong is described as a hybrid CBDC.
Most financial technology innovations in recent years have been in emerging markets, as developed markets are well served by credit and debit cards, said Emir Hrnjic, head of FinTech training at the Asian Institute of Digital Finance.
“Smaller nations are quicker to embrace digital currencies because they have real challenges to overcome, and the risk of adopting a new technology is probably lower than the risk of not doing anything,” added Chea Serey at the NBC.
Bakong is also meant to help small businesses, and reduce the cost of sending remittances for the more than 1 million Cambodian migrant workers abroad who otherwise pay a hefty fee to money transfer services and informal agents.
In 2019, overseas Cambodian migrant workers sent remittances worth about $1.5 billion, equivalent to nearly 6% of the country’s gross domestic product.
Cambodian migrant workers in Malaysia can now send money to their unbanked families through Bakong, and the NBC is looking to add other countries to the platform.
“Rural families depend a great deal on money sent to them by workers in the cities or overseas. So this is critical,” said Hong Reaksmey, director of the global charity ActionAid in Cambodia.
“It’s also useful for the government to send cash transfers, and for the aid and development sector to assist families during times such as Covid-19.”
With Bakong, users can make payments and transfers in the US dollar or Cambodian riel — the two currencies used in the country — with just a phone number or QR code.
The Bakong system uses no personally identifiable information and preserves the privacy of users while still allowing the central bank to view transactions, said Takemiya.
The inherent security features of the blockchain also mean fewer risks of fraud, tampering and cyberattacks, he said, adding that his company is researching a CBDC model for Laos, which also has a big unbanked population and high mobile penetration.
“Smaller nations are quicker to embrace digital currencies because they have real challenges to overcome, and the risk of adopting a new technology is probably lower than the risk of not doing anything”
CHEA SEREY National Bank of Cambodia