Cambodia’s Digital Currency: A Catalyst for Strengthening Local Fiat

In an era where digital currencies are reshaping financial landscapes globally, Cambodia has emerged as a noteworthy player with its Central Bank Digital Currency (CBDC), Bakong. Introduced in 2020, Bakong is poised to significantly bolster the use of Cambodia’s local fiat currency, the riel, particularly through its advanced cross-border payment capabilities and efforts to increase financial inclusion.

The Launch and Adoption of Bakong

Since its inception, Bakong has facilitated substantial digital transactions, reaching a total of $70 billion by 2023, a figure nearly double Cambodia’s GDP. This remarkable adoption highlights Bakong’s role in the country’s financial ecosystem, where over 80% of the economy traditionally operates with the U.S. dollar due to a dual-currency system. However, the local currency, the riel, is gaining prominence, especially in digital transactions where its usage is considerably higher.

Cross-Border Transactions and Financial Inclusion

One of Bakong’s significant contributions is its ability to facilitate cross-border QR code payments. This feature is instrumental in promoting the use of the riel beyond Cambodia’s borders, extending its functionality to transactions with neighboring countries like Thailand, Laos, and Vietnam, as well as integrating with China’s UnionPay. These cross-border transactions exclusively use the riel, requiring Cambodian citizens to maintain riel Bakong accounts for international transactions, thus enhancing the currency’s utility and adoption.

The integration of Bakong with international payment systems not only boosts the use of the riel but also aligns with Cambodia’s broader financial inclusion goals. By providing a scalable, inclusive, and cost-efficient digital payment system, Bakong ensures that both financial institutions and end-users benefit from its adoption. As a result, nearly 200,000 people use the Bakong digital wallet, with around six million benefiting indirectly through connected banking apps.

Strategic Phases of Implementation

The deployment of Bakong has been carefully structured in phases to ensure its effective integration and functionality. Initially launched to enhance domestic payments, the system has now extended to support significant cross-border transactions. Looking ahead, Cambodia’s central bank plans to introduce cross-border payments with India by June 2024 and is exploring similar collaborations with Japan. These initiatives are expected to further solidify Bakong’s role in the international financial system.

The Future of Digital Currency in Cambodia

Cambodia’s central bank governor, Chea Serey, emphasized the potential of Bakong to transform the country’s financial landscape by boosting the use of the riel. In her discussions at the Nikkei’s Future of Asia conference, she highlighted the complexities of internationalizing digital currencies and the necessity of integrating diverse technologies across countries to manage capital flows and adhere to Know-Your-Client (KYC) processes.

Serey pointed out that while over 80% of Cambodia’s economy operates with the U.S. dollar, the government aims to increase the usage of the riel, particularly in digital transactions. The dual support of Bakong, backed by both the riel and the U.S. dollar, provides stability and broad usability, enhancing its appeal within Cambodia’s unique dual-currency system.

Benefits of the Bakong System

The Bakong system demonstrates how a central bank digital currency can enhance financial inclusion and economic stability. By facilitating easier, faster, and more secure transactions, Bakong helps reduce the reliance on cash and traditional banking systems, which can be less accessible to rural and underserved populations.

Moreover, Bakong’s integration with international payment systems highlights its role in promoting regional economic cooperation. The ability to conduct cross-border transactions in local currency not only strengthens the riel but also fosters economic ties with neighboring countries, supporting broader economic growth and development in the region.

Conclusion

Cambodia’s digital currency, Bakong, represents a forward-thinking approach to integrating digital financial systems with traditional fiat currencies. By enhancing the use of the riel through advanced digital payment solutions and cross-border transaction capabilities, Bakong is set to play a pivotal role in Cambodia’s financial future. As the system continues to evolve and expand its reach, it offers a model for other countries exploring the potential of digital currencies to bolster local fiat and enhance financial inclusion.

The success of Bakong underscores the importance of innovative financial solutions in modern economies, paving the way for a more inclusive and efficient financial system that benefits both individuals and businesses.