What Cambodia's Project Bakong tells us about the trajectory of central bank digital currencies

On Wednesday, my colleague Mike Orcutt published a deep-dive analysis of the Cambodian central bank's efforts to stand up its own digital currency.

Project Bakong is a notable initiative with lofty goals — including the hope to draw some distance between the local currency, the riel, and the dominant U.S. dollar. The plan is to go live later this year, which would put Cambodia at the front of the line for countries that are actually moving ahead with central bank-issued digital currencies.

As we have documented here at The Block, Cambodia is far from alone. China especially has moved aggressively toward launching its own digital currency, and like in Cambodia's case the ultimate product appears to look nothing like what we commonly understand to be blockchains. It has even started testing the system in several localities, in partnership with state-owned banks via mobile apps.

The Cambodia story tells us a few things. We're getting a hint about technology preferences — in the case of Project Bakong, the system is using Hyperledger Iroha, one of a handful of protocols that exist under the Hyperledger umbrella. As I wrote back in 2016, Iroha was the product of several companies — including startup Soramitsu and IT firm Hitachi, among others — and is designed with mobile applications in mind.

Competing platforms have also drawn interest from central banks, for instance R3's Corda, which Thailand's central bank used to build a prototype last year. And last month, Libra made it clear that it hopes to one day attract central banks to its yet-to-be-launched platform.

It's Iroha's mobile-centric approach that likely drew Cambodia's attention. As Orcutt wrote:

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."

Financial inclusion has been cited as one reason for central banks to pursue these kinds of projects. One example is the Republic of the Marshall Islands, which has put its proposed CBDC — the Sov — squarely in the financial inclusion court. And here's the International Monetary Fund back in December:

"CBDC may provide a safe and liquid government-backed means of payment to the public that does not require individuals to even hold a bank account. Some central banks view this as essential in an ever more digital world, where cash use is progressively diminishing, especially in countries where banking sector penetration is low."

Then, of course, there's the United States, where national security, instead of financial inclusion, seems to be the driving force advocates, like former Commodity Futures Trading Commission (CFTC) chair Chris Giancarlo, have advanced for a "digital dollar." The dollar is dominant in the traditional financial system, giving the U.S. a level of influence over the financial system that Giancarlo and others argue the nation stands to lose if it doesn't digitize its money.

Federal Reserve chairman Jerome Powell was quizzed by lawmakers in February about the U.S. central bank’s work on digital currency, with both the Libra stablecoin project and China's efforts as a conversational backdrop. Powell said that "we're working hard on it," though he declined to offer much in the way of specificity.

The Federal Reserve is thinking about financial inclusion too, though. During a speech in December, Fed governor Lael Brainard said the central bank's research efforts would explore whether having consumers directly plugged into a publicly run payment network would deliver faster and more efficient payments for a broader range of people than have access to that kind of thing now.

It's doubtful that the Fed will rush into any kind of digital currency launch. It's important to keep in mind, though, that the decision is not necessarily up to the central bank. Congress could at any time decide to mandate that creation of a new digital payment system or even a digital dollar. In fact, powerful Democrats in the House advocated for just that in the run-up to the Covid-19 stimulus bill.

However it shakes out, it's likely that we are going to hear more about CBDC as 2020 unfolds, as the coronavirus pandemic has pushed the concept further into the limelight.