Creating a central bank digital currency (CBDC) is a journey into the unknown.
Many of the world’s central banks are looking for a way to gain all the benefits of a cryptocurrency, with none of the disadvantages.
Perhaps banks can lower the risk by taking one step at a time.
That’s what the National Bank of Cambodia (NBC) is doing. The central bank partnered with blockchain developer experts, Soramitsu to modernize the country’s legacy retail payments with the help of the Hyperledger Iroha blockchain framework.
The project, called Bakong, is a smart first step that created a fiat-backed digital currency. Individuals can now transfer money and buy from merchants with a simple smartphone app. Merchants gain a fast, cashless, and secure payments system. And banks can do interbank transfers at much lower cost.
A pilot project went live in July 2019 and ran successfully with more than 10,000 users. The next step is to let everyone in the country know that the system is available and working. That makes Bakong the world’s first CBDC-like payment system.
System Graphic
In the Kingdom of Cambodia in Southeast Asia, three-quarters (78%) of its citizens have no bank account, yet more than half own a smartphone.
And even though the native currency—the Khmer riel (KHR)—has been stable for 20 years, most people there use the U.S. dollar. Ever since a major UN mission in the mid-1990s, the price of everything from a cup of coffee to a car has been given in U.S. dollars.
Converting a price to KHR involves multiplying by a factor of 4,075: not the simplest calculation to do in a busy market. For some time, the NBC had wanted to “de-dollarize” the retail segment; in other words, to regain control of the country’s currency.
Central banks tend to focus on wholesale settlements between domestic banks. But when various banks and third parties use different retail banking systems, these often don’t communicate well with one other.
The NBC wondered if distributed ledger technology (DLT) could help solve all of these problems.
Could a blockchain-based system handle transactions faster and for lower cost than the existing system? Could that promote wider use of the riel?
And could that system run as a mobile app that any citizen with a smartphone could use to shop or transfer money to family or friends?
When most people picture a CBDC, they imagine an entirely new digital asset created out of “thin air.” The problem is, this new asset could distort a country’s monetary policy and affect its exchange rates.
To be prudent, Cambodia’s central bank wanted to create a digital token backed by fiat currency stored safely in its vaults. The new payments platform would become a way to move around digitized cash, while preserving the creditworthiness and security of the central bank.
With a digital payments system in place, individual consumers—even the unbanked—could pay with their smartphones, merchants could rely less on cash, and banks could save costs on interbank transfers.
These were ambitious goals. In 2016, the NBC set up a working group to explore whether any technologies could help reach them.
“We aim to improve financial inclusion, efficiency and safety, as well as promote the use of our local currency,” says Her Excellency Madam Chea Serey, Director General of the NBC. “Bakong will play a central role in bringing all players in the payment space in Cambodia under the same platform, making it easy for end-users to pay each other regardless of the institutions they bank with.”