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Friday, August 13, 2021

In a move to reduce US dollar use, Cambodia implements a Digital Currency using SORAMITSU technology

“Bakong” currency use has gained popularity due to the increase in use of digital payments.

Chea Serey, director general of the National Bank of Cambodia, October, 2020. © Kyodo
As central banks across the world are rushing to develop their own digital currencies, fuelled by the need to provide safe and convenient payment solutions, few have been as successful in implementing them like the National Bank of Cambodia.
China has made progress with their digital yuan while the European Central Bank is still in the research phase of their digital euro project and may take up to two years before they begin work on any substantial lead regarding the use and implementation of a central bank digital currency (CBDC).
The most advanced project is the "Bakong" digital currency, which was launched in Cambodia in October 2020, and is currently one of two active CBDC projects, with the other being the Bahamas' Sand Dollar.

Bakong was developed as a collaboration between the National Bank of Cambodia and the Japanese blockchain company SORAMITSU using Hyperledger Iroha technology. One of the main purposes was to foster the use of the riel while reducing the use of the US dollar from their local economy.

The project leader of Bakong is NBC's director general, Chea Serey. Speaking with Nikkei Asia she mentioned that the project began as a way to unify the payment systems in Cambodia, which up to now have been fragmented.

Thanks to the implementation of Bakong within local banking apps, 5.9 million users have benefitted from this service within the first six months of 2021. Users of Bakong's digital wallet have reached the 200,000 mark and over 1.4million transactions, an equivalent of $500 million have been recorded in the same time period.

The director general is quite satisfied with the success of user implementation, especially as digital payments have increased. Needless to say, the COVID situation has benefitted Bakong's implementation, as she mentions that the switch to a digital medium has been aided by the timing of the current circumstances.

The big difference between Bakong and other cryptocurrencies is that it is linked to money within central banks, and therefore less volatile.

Thanks to Bakong, Cambodian citizens can pay for goods and services or transfer funds, both in US dollars or riel digitally, using an app on their mobile phones.

Currently, Cambodia runs a dual-currency system, although one of the main reasons behind the implementation of Bakong is to reduce the use of the US dollar, which began circulating widely in the country beginning in the 80's due to the political uncertainties happening at the time.

Cambodia runs a dual-currency system that has the US dollar in circulation along with the local riel. (File photo by Reuters)
Although the US dollar supported the Cambodian financial recovery, Chea Serey mentions that it is time to foster the growth of the local economy through phasing out the reliance on the US dollar. This will also assist the central bank to better control money supply and circulation while maintaining an independent policy over its currency.
"There are other policies that need to be in place, like having a stable exchange rate and inflation rate, as well as [economic] growth prospects," says Chea Serey, when asked if Bakong will be the determining factor in accomplishing the goal of switching Cambodia's dual-currency economy, although it has done a great job so far in increasing the presence of the riel through digital transactions.

Chea Serey tries to avoid using the word "de-dollarization" due to the financial consequences it could bear toward global investors, but affirms that the long term goal of the project is to exclusively use their local currency, but in the meantime, Bakong seeks to encourage and increase the use of their local currency.

A future milestone for Bakong is the implementation of cross-border transactions. The NBC is making great progress on this by working with the central bank of Thailand and Malaysia's Maybank.

Because many women migrate from Cambodia to Malaysia, Chea Serey mentions that they "need a safe and efficient way to send money to their families." Thanks to the reduction of third parties involved, it would also have the beneficial secondary effect of empowering these women to have financial independence.

CBDCs are being adopted more and more by countries, however, their counterparts such as bitcoin are facing tight regulation due to the volatility of their nature.

Countries around the world are taking strict measures against these technologies, crypto related services within financial institutions and crypto mining are prohibited in China, with the latter having suffered a recent crackdown. Meanwhile the US and Europe are tightening rules aimed at cryptocurrency transfers and enforcing KYC measures.

"Who is going to take responsibility when the price crashes?" wonders Chea Serey when asked about currencies such as bitcoin and their valuations. She concurs that consumer protection and regulations are necessary, especially when investors could stand to lose so much.

This article was originally published by Nikkei Asia here