Cambodia has gone from dark horse to front runner in Asia in the race to roll out a national digital currency, launching its bakong central bank digital currency in October 2020.
The National Bank of Cambodia worked with Japanese blockchain technology company Soramitsu to develop the bakong, which co-exists with the riel, the country’s official currency. Twenty-five local banks, financial institutions and payment services providers have signed up to make the bakong available as an alternative to cash.
‘Many developing countries are seriously considering central bank digital currencies’
‘These developing countries need digital currencies more than advanced countries,’ says Seen-Meng Chew, associate professor of practice in finance and associate dean for external engagement at the Chinese University of Hong Kong Business School. ‘While the Hong Kong and US dollars are very resilient, the riel is not very valuable, so the US dollar is widely used.’
The relatively quick and widespread adoption of the bakong should help the riel, says Benjamin Quinlan, CEO and managing partner at independent strategy consultancy Quinlan & Associates. ‘Since the bakong is denominated in riel, it will add more clout to the currency. However, the bottom line is that the riel remains heavily tied to the US dollar.’
Leader of the pack
Cambodia is by no means alone in its push to develop a national digital currency. Fifteen countries are piloting central bank digital currencies, a further 81 are exploring options, and five Caribbean nations have launched their own full-blown central bank digital currencies.
‘Supranational digital currencies and cryptocurrencies will be used more in countries that have weak economies’
Challenge for accountants
Valuation is a key but difficult issue for accountants and finance professionals to resolve as the bakong and other digital currencies are introduced.
Decentralised digital currencies such as bitcoin have no clear value anchor, while central bank digital currencies face the same challenges as national currencies as well as others created by their digital nature.
‘This will be a challenge, particularly for accountants, as valuations using digital currencies will be difficult,’ says Chew. ‘Bitcoin, for example, is still reliant on a US dollar value, which was around $65,068 on October 21, 2021. We still need to determine the goods-stored value and whether it is effective as money; and it is different from foreign exchange, where a solid valuation system is
In Asia Pacific, Japan’s central bank is trialling a retail-focused digital yen, Bank of Korea is working on the e-won, and Singapore is developing a common settlement platform for multiple national digital currencies.
As for China, it is testing a digital yuan across four major cities – Shenzhen, Chengdu, Suzhou and Xiong’an – ahead of the Winter Olympics being staged in Beijing in February 2022. As of September 2021, over 70 million digital yuan transactions had been successfully completed.
‘Given it is both a largely command economy and a cashless society, China will face fewer challenges introducing a digital currency,’ says Chew. ‘It has the infrastructure support it needs in place, and it would not be surprising if it is the first or one of the first countries to fully introduce a digital currency nationwide.’
‘Cambodia focuses more on financial inclusion than the People’s Bank of China does in China, but both countries have the goal of reducing dependence on the US dollar and strengthening their local economies,’ says Makoto Takemiya, group CEO at Soramitsu.
Hong Kong, a key financial centre, is also taking steps to roll out the e-HKD, its own digital currency. The Hong Kong Monetary Authority has issued a paper on the digital currency and is now seeking comment.
‘In Hong Kong’s case, the main benefit will be an improved payment infrastructure, which means more efficient payment systems for individuals and businesses,’ says Chew. He points out that a foundation is already in place in the form of the Octopus stored-value card, introduced in 1997 as a payment method for the city’s public transit infrastructure but now widely used for all kinds of payments.
Resistance and risk
However, an ageing population is a major hurdle for the widespread adoption of digital currencies such as the e-HKD.
‘Older people are not familiar with how to use the technology, such as mobile gadgets, that you need to use digital currencies. I estimate that it will take a decade or two for the technology literacy to catch up,’ says Chew.
Cybersecurity risks are another consideration that regulators and major banks need to address.
Despite these challenges, Soramitsu’s Takemiya believes that more countries will emulate Cambodia and make a serious push towards adopting digital currencies. These can take different forms. In Latin America, El Salvador became the first country to adopt bitcoin as legal tender, in September 2021. At a different level, Facebook has proposed diem, a blockchain-based payment system, while the Sora Network provides tools for decentralised applications for digital assets.
‘Many developing countries are seriously considering central bank digital currencies,’ says Takemiya. ‘I think that in addition to digital currencies issued by central banks, supranational digital currencies such as diem, and cryptocurrencies such as bitcoin and sora, will start to be used more and more in countries that have weak economies or poor monetary policy.’
Domestic to crossborder
A natural next step for digital currencies after establishing a domestic presence is to move into crossborder transactions. Although there is still a lot of work to be done to establish interoperability between systems in different countries, the forward progress is visible.
For example, the Bank for International Settlements’ Innovation Hub in Hong Kong, HKMA, the Bank of Thailand, the People’s Bank of China’s Digital Currency Institute, and the Central Bank of the United Arab Emirates are working together on a prototype common interoperable platform called mBridge.
The mBridge initiative is currently at the exploratory stage, says Chew, ‘but once an agreement is reached, this could be a gamechanger’.
More information
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