Why Cambodia is eager to launch its own DLT-based digital currency — or whatever you want to call it

Serey Chea doesn’t seem concerned about whether people think the new distributed ledger-based money system that Cambodia plans to launch this year is technically a digital currency. Either way, that’s not what she and her colleagues at the National Bank of Cambodia (NBC) call it.

“Some of you may have heard that Cambodia is one of the first countries in the world to launch a central bank digital currency,” Chea, an assistant governor at the NBC, said last week during CoinDesk’s Consensus conference. “For us, this is just a backbone payment system.”

Whatever it is, the network, which Chea expects to launch this year, will use distributed ledger technology (DLT), an approach she said is the best way to make all the nation’s various financial institutions interoperable. Such a unified network will open the door for more people to participate in the financial system, she said. The platform, called Project Bakong, will also be designed to let Cambodia’s large population of migrant workers send money home much more cheaply than they can today.

But perhaps most importantly: if it works, the new system is poised to wean the country’s economy off of its heavy dependence on the U.S. dollar.

In other words, whether or not it is technically issuing a central bank digital currency (CBDC), the NBC is trying to catalyze an increase in the use of the nation’s own currency, the riel, by digitizing it. And whether what Cambodia’s central bankers are building is actually a CBDC, they will have to address many of the same complicated design challenges — particularly with respect to user privacy.

A ledger to unite them all

According to Chea, Cambodia has an opportunity to include more people in its financial system by expanding the interoperability of financial institutions, particularly the country’s various “e-wallet” providers.

In fact, more people in Cambodia use e-wallet services, generally offered by technology companies, than have accounts at commercial banks, she said. “We saw that as an opportunity to further our financial inclusion in general, through a mobile platform.”

Today, Cambodian banks are already connected through a central bank-run platform for real-time money transfers. But the e-wallet providers are walled gardens; if a user wants to transfer money, the recipient has to be registered with the same service.

A priority for Project Bakong is to “allow interoperability between all the different players in the industry,” said Chea. The bank chose to use DLT, she said, because it is the simplest and least expensive way to do that from both a technical design as well as a regulatory compliance perspective.

The specific protocol the bank has chosen is called Hyperledger Iroha, one of six “enterprise blockchain” protocols supported by the Hypeledger Project, an open-source development community hosted by the Linux Foundation. One of the lesser-known Hyperledger projects, Iroha is distinguished by being “very lightweight” and having “a very little amount of code,” says Brian Behlendorf, Hyperledger’s executive director.

Originally developed by Soramitsu, a blockchain company based in Tokyo, Iroha was designed with simplicity in mind. The philosophy behind it is that “you want to emphasize explicitness and security when doing tasks on a blockchain, because anything that is done cannot easily be undone,” Soramitsu’s CEO Makoto Takemiya told The Block in an email. “Other blockchains try to be flexible and do everything and this creates a larger attack surface and also reduces the potential transactional performance of the system.”

Perhaps just as important: Iroha also has “very nice” user interface toolkits for mobile devices, says Behlendorf.

To use Bakong, people will have to download the mobile app and then register with one of the participating institutions (13 have signed up thus far). The selected institution will then be responsible for performing “due diligence” on that customer, according to Chea.

Users will have to provide a government-issued ID and their Cambodian phone number. Once that process is complete, the institution will provide the customer with a wallet account that can be used to pay via QR code and send money to others who have registered with the Bakong system. “All they need is a phone number, and they’ll be able to send money,” said Chea.

Mostly about the money?

If all goes as planned, Bakong won’t just work in Cambodia. The NBC recently signed a memorandum of understanding with May Bank, one of the largest banks in Southeast Asia, to develop a cross-border payment system that would let migrant workers use it to send money home in the form of digital riels — saving them money along the way.

In fact, the central bank’s desire for more people in Cambodia to use riels — instead of U.S. dollars — lies at the heart of Project Bakong. More than 90% of the nation’s economy is based on the dollar. If the riel were to become more popular, the nation would be less affected by changes in U.S. monetary policy. And if it can convince more people to use the riel by simply making it easier to use, that could stimulate local economic growth.

The main reason people shun the riel is not based on economics, Chea said. The currencies in other “dollarized” countries tend to have volatile inflation and exchange rates. The riel, in contrast, has a low inflation rate and a relatively stable exchange rate.

So what’s the problem? According to Chea, the results from a national survey suggest that people simply find carrying and paying with riels inconvenient. Since one dollar converts to 4,000 riels, paying with local currency requires carrying around lots of cash, not to mention keeping track of lots of decimal places.

“So we thought that if we were to make the payment in the electronic form, then people won’t have to bother so much about the number of zeroes and the inconvenience of carrying a lot of banknotes in their pocket,” said Chea.

Identify yourself!

Peer-to-peer value transfer, cheaper cross-border payments, and greater financial inclusion: each of these selling points for Bakong are also real-world benefits that have been touted by cryptocurrency advocates. But Bakong looks virtually nothing like a cryptocurrency.

To begin with, the only transaction validator will be the central bank. And since users will need a Cambodian phone number in order to gain access to the system, Bakong’s digital currency will not be freely tradeable outside the system.

Still, Chea and her colleagues at the NBC will have to address many of the same complicated technical and philosophical questions facing the many other central bankers around the world now seriously considering issuing CBDCs. That’s especially true for privacy. Specifically: to what extent should CBDCs aim to preserve the kind of privacy that’s inherent in physical cash?

Some nations, like Sweden, are grappling with a rapid decline in the use of cash; Sweden’s central bankers are worried about leaving the payments market completely to the private sector, which may exclude some groups of people. A publicly-run alternative could theoretically be more accessible and inclusive, since providing a public good — rather than trying to generate a profit — would be the goal.

Cambodia’s cash issues are different. Too much of its local commerce relies on physical U.S. dollars — at least, that’s the view of Chea and her colleagues at the central bank.

The benefit to the Cambodian government in digitizing the riel is two-pronged. Besides potentially stimulating economic growth and gaining more control over monetary policy, the digital transaction data could help law enforcement officials police money laundering and tax evasion.

And therein lies the danger: the plausible risk that such transaction data falls into the hands of people who might use it for authoritarian-style surveillance and censorship.

Since accessing the Bakong system will require a government ID, there will be no anonymous transactions. Chea did not reveal any details about how the system will protect user privacy, but did promise that NBC would be releasing a white paper in the coming weeks.

Bakong’s current design lets users transact under a small daily limit after completing a know-your-customer (KYC) process via their smartphone, and they can increase the limit by going into a commercial bank and confirming their identity in person, said Takemiya.

“Right now usability improvements that may lead to an e-KYC system are under development, but this is more of a regulatory challenge than a technological one,” Takemiya explained.