Cambodia no longer wants to be dependent on the US dollar, and its centralised cryptocurrency has already attracted 5.9 million users.
- Cambodia has embarked on an ambitious project to grow its CBDC called Bakong. The end goal is to reduce dependence on the US dollar.
- Bakong works seamlessly with Cambodia's legacy payment solutions and has been adopted by 18 financial institutions.
- Since a CBDC is centrally backed, the country can once again try to regulate e-riel and leverage the country's rising economic might.
- With Bakong, Cambodia joins nations like China, who've already rolled out their digital money via pilot projects.
Bitcoin and other cryptocurrencies have been touted for their potential to bring developing nations out from under the umbrella of the dollar. Unlike El Salvador, which adopted Bitcoin as legal tender earlier this year, Cambodia wants to ditch the dollar using its own central bank digital currency (CBDC).
The south-east Asian country’s CBDC is called Bakong, and it already has 5.9 million users. The COVID-19 pandemic fueled its adoption even further with digital payments getting a boost. During the first half of 2021, Bakong users conducted around 1.4 million transactions amounting to $500 million, according to data cited by Nikkei Asia.
With the CBDC, Cambodia joins an elite league of nations like China that have already rolled out their digital money via pilot projects and are on track to making a massive pivot in the coming years.
Bakong leads the CBDC race
Cambodia has a population of just 17 million, almost comparable to the Indian union territory of Delhi. Despite its small size, the country currently leads the CBDC race. Bakong is pegged as the new backbone for the Cambodian Payments and settlement infrastructure. It supports transactions in Cambodian riel or the US dollar.
The project was first introduced by the National Bank of Cambodia ( NBC) in October last year, built upon blockchain technology co-developed by Japanese fintech firm Soramitsu. The project's primary aim was to explore digital payments, encourage the use of local currency, and improve financial inclusion among underserved citizens — those left of the traditional banking system.
So far, Bakong has worked seamlessly with Cambodia's legacy payment solutions, like Acleda, FTB, Vattanac, and Wing, and has been adopted by 18 financial institutions.
How does Bakong work?
The Bakong Core is powered by Hyperledger Iroha, a permission-based append-only distributed blockchain, which records all transactions inflexibly in a chronological chain of records stored in multiple nodes.
Users looking to open a higher-limit account can register their government-issued ID at a bank branch, whereas those opening lower-limit accounts can do so via SMS verification. Unlike Bitcoin or Ethereum, not every user on the blockchain gets full transparency. Instead, nodes are allowed to maintain central scrutiny.
Why is Cambodia so keen on distancing itself from the US dollar?
The Cambodian riel has been around since 1980, but it has lost a significant degree of its value against major currencies in the past decades. Dollarisation of the economy was quick because riel's value was practically in free fall due to hyperinflation.
Today, the dollar is still the most widely used currency, with riel being dished out as change for anything less than $1. Its usage is limited to rural regions, and almost all ATMs in the country dispense the dollar.
With Cambodia continuing to be a cash-intensive country, the government wants to change the status quo with the adoption of digital payments. The CBDC gives authorities a second chance to fix the riel, transform it, and reduce dependence on foreign currencies.
Since a CBDC is centrally backed, the country can once again try to regulate e-riel and leverage the country's rising economic might in terms of tourism, manufacturing, and servicing.
What is dollarisation?
Dollarisation often means handing over one's independent monetary policy in the hands of the US. The respective central bank has no control over the dollar.
American companies and businesses are best suited to take advantage, while the smaller country loses its economic autonomy. Remittances, international payments, and other transactions eat up a considerable amount of wealth in forex charges, service fees, and more.
A strong riel means Cambodia can slowly phase out dollar dependence and directly transact with regional neighbours such as Vietnam, Thailand, Malaysia, and Singapore. In the event of a financial crisis, the central bank also attains the freedom to opt for localised measures, again giving it far more control over its monetary system.
Cryptocurrencies vs CBDCs
While El Salvador's Bitcoin move helps it bypass the dollar in the short term, it raises questions over the country's long-term monetary policy. IMF has consistently raised concerns over Bitcoin adoption due to international obligations amid high volatility. Cambodia's solution is considered far safer and stable because it's directly tied to its economic might.
Similarly, Iran is also trying to distance itself from the dollar and actively looking for alternatives. Since it’s sanctioned by the US, the Iranian riel is practically worthless and there’s little access to the dollar. Leaving it with no other option but to increase dependence on cryptocurrencies such as Bitcoin.
Meanwhile, other large economies, such as the US and the European Union, have procrastinated. Still, recent statements by decision-makers indicate that the European and American CBDC projects could gain traction amid increasing pressure from China and its digital yuan initiative. While cryptocurrencies have become mainstream for the average retail investor, CBDCs are touted as the next big thing for the institutional big-wigs. After China and Cambodia, the Bahamas are the only ones to lead the CBDC race so far.