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 – which provides a platform for more than a dozen banks and financial institutions – has reached about 5.9 million users, with transactions worth nearly $2 billion so far, according to the NBC.
“We didn’t foresee a pandemic when we launched in 2020,” said Chea Serey, director general of the NBC.
“But it was a blessing in disguise, as adoption was faster because people were worried about handling money,” she said.
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 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 with the bank.
More than 200,000 previously unbanked Cambodians use a Bakong e-wallet now, the NBC said.
That is just a fraction of the more than 70% of the 17-million population estimated to be unbanked in the neighbouring country 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 in Tokyo.
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 earlier this year of 65 central banks by the Bank for International Settlements showed 86% were exploring or testing digital currencies, with emerging and developing economy central banks more likely to issue 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 this year. Bakong is described as a hybrid CBDC.
Most financial technology innovations in recent years have been in emerging markets, as developed markets have been 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 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 overseas 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 at 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 – which is otherwise quite hard with the large numbers of the unbanked,” he said.
But low levels of digital and financial literacy are a challenge, he added, noting the rise in cyber scams in Cambodia.
Means to an end
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 blockchain records all transactions in a chronological series of cryptographically-secured records.
While the blockchain-based system supports faster, more transparent settlements and lower costs, it also gives central banks the “power to observe and control individuals’ finances which could violate customers’ privacy,” said Hrnjic.
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 they are researching a CBDC model for Laos, which also has a big unbanked population and high mobile penetration.
Still, the fundamental challenges of low levels of digital and financial literacy, as well as unequal access to internet and mobile connectivity remain.
Thea Chounly, a garment worker in the Cambodian capital Phnom Penh, has long used Wing – a money transfer service that requires the sender and recipient to visit an outlet – to send money to his family in the province.
“Bakong is a new system, so nobody is using it,” he said. “Everyone uses Wing or TrueMoney, so it’s easier for me and my family to keep using that.”
NBC is aware of the challenges, said Chea.
“Technology is a means to an end, not the end goal,” she said. “We hope to increase adoption by improving the financial and digital literacy of migrant workers and their families.”