Cambodia’s central bank uses CBDC to stifle dollarization of local economy

The National Bank of Cambodia (NBC) has recorded wins in its campaign against the dollarization of the local economy using Bakong, its version of a central bank digital currency (CBDC).

Since the Southeast Asian country returned to civilian rule, the U.S. dollar has played a role in payments, accounting for a significant chunk of local transactions. While relying on the U.S. dollar for stability, Cambodia’s economy became prone to external shocks as NBC lost control over monetary policy.

The NBC rolled out Bakong to operate as a digital currency payment system, with experts describing the offering as a CBDC. Launched in 2020, the offering has notched impressive adoption figures amid a noticeable decline in the reliance on U.S. dollars for local payments.

According to the NBC, riel payments via Bakong are up by over 50% since the launch of the offering, encouraged by several government initiatives to attract new users. For one, monetary policy from the central bank has kept the riel stable against the U.S. dollar while low transaction fees have increased sign-ups.

The NBC says there are 10 million active Bakong wallets out of the 17 million population. In the first two years of launch, Bakong recorded impressive growth, but recent metrics indicate waning adoption levels, forcing the central bank to explore new strategies.

Despite the decline in the number of new users, transaction volumes are at an all-time high, with enterprises and private users leaning on the platform for settlement. In the first six months of 2022, users generated volumes of nearly $40 billion, nearly doubling the figures from the first two quarters of 2023.

Executives at the NBC are keen on improving the use cases for Bakong to attract new users. The obvious option for the central bank is to explore utilities for cross-border transactions, reduce transaction fees, and eliminate traditional issues with the CBDC.

Early collaborations have seen the central bank strike cross-border deals with Laos, Vietnam, and Thailand, with insiders revealing plans to expand partnerships to South Korea, India, China, and Singapore.

Walking the tightrope of digitization

While Cambodia is turning to digitization in the fight against dollarization, critics argue that the pivot could fuel an even more aggressive reliance on the U.S. dollar. The critics point to the increasing reliance on digital assets and U.S.-denominated stablecoins by retail and institutional investors in the country.

Apart from fuelling the dollarization of the economy, one report claimed that criminal syndicates allegedly use Tether to facilitate pig-butchering scams. The report opined that wallets operated by the bad actors have received well over $2 billion from victims through USDT and other dollar-denominated stablecoins.