As a little girl, Her Excellency Serey Chea was obsessed with "The X-Files" television program and the idea that we are not alone in this universe. Fascinated by the extraterrestrial and outer space, she dreamed of becoming an astronaut. But her father, Chanto Chea, who is governor of the National Bank of Cambodia (NBC) today, said: My poor girl, Cambodia is not going to launch any spaceship out there any time soon, so you’re not going to be able to get any job.
Chea, now 40, was self-conscious about holding a Cambodian passport. In the 1980s, Cambodia was isolated from the international community and she felt certain prospective international employers would jump to all sorts of conclusions about her nationality, the university where she studied and so on.
“I mean, I can’t imagine applying as a Cambodian to NASA,” she says of the U.S. space agency, laughing off a notion she thought so preposterous, so foolish, only a child’s imagination could come up with it.
Begrudgingly, she took the road well traveled to follow in Dad’s footsteps and study accounting instead.
“I realized very early on that when you’re a girl, and you’re from a developing country, there are certain doors closed to you already. So you explore other options,” she said.
Even before she graduated, her dad had offered her a role at NBC. It was 1999, it was her first-ever job and she positively loathed the idea of working at the central bank. It was way too boring for someone curious and creative.
But over time she’s clearly become more at ease with the idea. Before she turned 35, she worked her way up to become NBC’s director general. And today she’s heading a project with huge implications for Cambodia’s future.
You can call Project Bakong NBC’s moonshot. This blockchain-based “backbone payments system” could remake the lives of millions of people and set a benchmark for how such modern infrastructure can improve lives in the developing world and beyond. It's certainly already turning heads within the crypto community, which is intrigued by the idea of central banks doing a digital currency thing.
Central bank digital currencies, or CBDCs, are essentially digital representations of the cash that is issued and controlled by a central bank. Many central banks are now exploring the idea and advocates say the technology could make money move faster, cheaper and safer, allowing for instant payments, faster settlements and lower transaction costs.
Additionally, for an emerging economy like Cambodia, where nearly 80% of the population is unbanked, a CBDC could help include marginalized communities, Chea says. Plus, it could help the nation regain its monetary sovereignty after more than 40 years dollarization, a phenomena that can help nations achieve greater currency stability, but reduces room for economic maneuvering.
Strictly speaking, however, while Bakong may exhibit many characteristics that are similar to a CBDC, it isn’t one, and Chea has spent a good chunk of all her public appearances over the past year trying to explain as much. “There is a lot of confusion about the nature of this project,” she says.
Cambodia was never in the race to launch the world’s first CBDC, but it was reported that the Bahamas’ sand dollar had pipped them at the post. Other central banks were unsure, too, with this report from the Philippines’ Bangko Sentral ng Pilipinas placing Bakong in the retail CBDC category alongside China’s digital yuan.
Meanwhile, the World Economic Forum and International Monetary Fund attached the prefix quasi- in recognition that the system didn’t quite embody all the characteristics of a “true” CBDC, while Hyperledger Iroha, the platform on which Bakong was built, preferred to call it the world’s first blockchain-based retail payments system. Others argued that it wasn’t blockchain, but distributed ledger technology.
A giant leap for Cambodian kind
While the world has been desperate to determine if Bakong fits the definition of a CBDC or not, for Chea, its classification isn't important. NBC began to explore the idea back in 2016, a time when “blockchain was the poster boy or girl of the IT community,” as she recalls it. But her team was less inclined to romanticize the technology itself.
The team “stumbled across it” when searching for something that could satisfy the need to improve interoperability between financial institutions, advance financial inclusion – especially for the poor and unbanked in rural areas – and promote usage of the riel, Cambodia’s domestic currency, over the U.S. dollar.
While most developed countries have a real-time gross settlement system (RTGS) to facilitate the instantaneous transfer of money from one banking institution to another, Cambodia’s financial sector was lacking anything of the sort. The process to transfer money between institutions was highly fragmented and horribly cumbersome.
Bakong was designed to overcome this, by bringing all players together on to a common and interoperable platform. Participating member institutions surrender their fiat to the central bank and get a digitized version in return, which they can then distribute to end users. Peer-to-peer (P2P) payments are instant and free of charge, while institutions can use the Bakong engine to settle between themselves, cutting transfer times from days to mere seconds.
Customers access Bakong’s next-gen services via an app. Without it, they’d still have to travel all the way to a bricks-and-mortar location to do a money transfer, while the receiving party would have to attend another location to see if the funds had come through – defeating the purpose of a real-time payments solution in the first place.
But most of Cambodia’s smaller banks still don’t even have e-banking, Chea tells me (Cambodia’s leading financial institutions, ABA and Acleda, are digital outliers in a largely analog landscape). So Bakong was created as a universal app that anyone with a local phone number and Cambodian government-issued ID can download and use on their smartphone.
Manu Rajan, CEO of Wing, a mobile money and electronic payments service provider in Cambodia that served over 12 million unique customers in 2020, says Bakong will ease the transfer of funds between financial institutions.
With more than 9,000 agents facilitating cash in and cash out – more than double the number of bank branches and ATMs – Wing provides crucial last-mile infrastructure to all parts of Cambodia, even the most rural and hard to reach areas.
Before Bakong, every bank that wanted to access Wing’s extensive network had to integrate separately. But today, any customer from any of Bakong’s 47 participating member institutions can withdraw cash simply by locating one of Wing’s human ATMs. “The launch of Bakong has overnight made companies like Wing the default ATM of the country,” Rajan told me in an email.
In effect, Bakong plus Wing is a full run-around to a checking account plus ATM network, giving people the ability to transfer value and still control their cash.
Cambodia can jump to the most modern solution available without worrying about incumbent interests. Like Africa and China, which have also made huge advances in recent times, Cambodia can skip ahead of the West to adopt mobile money now.
In November 2020, when Chea spoke on the topic of leapfrog innovation at the Central Bank of the Future Conference, she realized many of her western peers didn’t understand what this looks like in real-life.
To offer some perspective, she explained how landlines were never really a thing in Cambodia, but in 2019 more than 100% of the population was subscribed to mobile. Likewise, Cambodia never needed to phase out those old-style credit cards with their fraud-prone magnetic stripes because people never used them. Instead, the nation jumped straight to the newer, better, safer chip-based EMV technology.
Examples such as these – and now, Bakong – demonstrate how the legacy systems that are characteristic of developed nations can actually impede the adoption of new tech.
Inching toward inclusion
Chea is a single mother with three teenagers and a three-year-old. Her youngest is the reason she was so intent on making Bakong a success, she says. She adopted the gravely sick baby at just three weeks old, after he came to her through the Raksa Koma Foundation (RKF), a charity Chea co-founded in 2013 providing medical care to underprivileged Cambodian children.
His birth mother, a former migrant worker who was suffering severe mental illness, had been targeted in her vulnerable state and became pregnant as a result of rape. She was unable to care for herself or her prematurely born baby, who was found covered in red ant bites and in desperate need of medical attention.
Sadly, the birth mother’s backstory is not uncommon across Southeast Asia. Nearly a decade earlier, she left her village due to the lack of jobs available and better wages to be found in Cambodia’s urban areas. She worked for years, diligently sending her earnings back to the family to be put toward their goal of building a house. But when she finally returned, it was to find that every last riel had been squandered away by her alcoholic father and drug-addicted brother.
Realizing her life’s work amounted to nothing – after years of toil and sacrifice in pursuit of a better future, not to mention the chronic loneliness often experienced by migrant workers – she spiraled into a deep, debilitating depression and, eventually, psychosis.
For Chea, this harrowing story underpins her fight for women’s financial inclusion and economic empowerment. Every time she looks into her little boy’s eyes, she is reminded of the transformative potential of fintech to allow women to take control of their livelihoods, assert their independence, invest in themselves and participate meaningfully in society.
Bakong’s other big use-case is to facilitate payments to Cambodia’s 16.5 million-strong population abroad.
Domestic and international remittances are a critical source of development funding and many poor families rely on this money to meet basic needs such as food, education and healthcare. In 2019, 1.2 million Cambodian workers sent $2.8 billion home from Thailand, South Korea, Japan, Singapore, Hong Kong, Malaysia and Saudi Arabia.
But once they are sent, the sender has little control over how the funds are spent. All too often, these trust-based arrangements are abused and cash is misused.
And the cost to send remittances is exorbitantly high with the global average sitting around 6.8% to send US$200 cross-border. According to Chea, in Cambodia the fees could be as high as 30%, depending on the service used.
Bakong addresses both issues. Firstly, it is free and instant to send funds to domestic recipients, and NBC has started experimenting with cross-border P2P transactions in partnership with Malaysia’s Maybank.
Secondly, the app can be used to pay invoices directly, such as school fees and electricity bills. This functionality provides users the ability to manage their own expenditure, giving them greater control over their finances, and ultimately, their future.
A bank account isn’t a prerequisite to use the service, but member banks are obliged to create one for any Bakong e-wallet holder who asks for it. For Chea, this is an important pathway to financial inclusion that requires a massive shift in mindset. The bank is keen to see Cambodians shift from spending to saving. Cambodia has a dangerously high level of indebtedness. Cambodians owe an eye-watering $3,800 per person to microfinance institutions (MFIs), the most per capita in the world.
'Bigger than numbers'
MFIs have earned a poor reputation in some development circles, but they do play a significant role in bridging the gap between the formal financial institutions and the rural poor, Chea says.
It was in 2003, when Chea was working as an officer in the MFI supervision department – another boring auditing job, as she recalls it – she was sent out to the province to oversee one of the micro-lenders. Part of the role was to meet with clients and it was there she came face to face with many families that would not have been able to send their children to school (or grow their small businesses or pay their medical bills) had they not had access to a micro-loan.
“That’s when I realized that my job has a much bigger impact than just looking at numbers,” said Chea.
With Bakong, financial institutions will now be able to reach Cambodia’s rural areas – where 90% of the country’s poor, low-skilled and unbanked live – in ways that were not possible for them before. It could even encourage banks to get creative in designing specialized solutions for the unbanked by helping to build credit scores based on financial history in the app.
Opened in 881 AD, the Bakong temple was one of the first of many opulent temples commissioned by the Khmer kings, and it served as the imperial temple of its time. Built as a symbol of sovereignty and independence, its iconic step-pyramid architecture became a prototype for many mountainesque structures that came to define this advanced civilization.
There are competing theories as to why the Khmer Empire eventually fell. If you consult the Cambodian Museum of Money and Economy, opened by NBC in 2019, you’ll learn it was because it had no form of currency. Run entirely through trade and barter, the civilization was unable to exchange value efficiently or effectively.
Cambodia has faced problems with this most basic social requirement for centuries.
The Khmer Empire might have enjoyed enduring prosperity had it just implemented an effective monetary system. Bakong, and its temple-like logo, conjures a vision of a proud empire at the dawn of a new era – albeit this time retrofitted with necessary payment rails. This picture of Cambodia, strong and powerful, is unlike the country’s status today.
In the last century, Cambodia was ravaged by war and political upheaval. After being bombed by the United States during the war with Vietnam in 1975 (despite Cambodia being neutral to the conflict), a radical Communist movement known as the Khmer Rouge took over Cambodia.
Then, to make a point about the capitalist system they sought to eradicate, the Khmer Rouge blew up the central bank. Accounts from the time recall how banknotes were scattered throughout the street, piles of it clogging gutters like garbage. Street kids used paper money as kindling to light fires.
Over its four-year rule, the Cambodian people suffered unspeakable atrocities at the hands of the Khmer Rouge. Millions were taken from their homes under a policy of breaking the economic hold that urban communities held over the rural, and were sent into backbreaking forced labor, given few rations to eat and made to live as peasants. Hundreds of thousands of people died of exhaustion, starvation or disease and bodies piled up, dumped in mass graves. Those deemed an intellectual threat to the regime – members of the former government, the educated, monks, anyone who wore glasses or spoke another language – were liable for even harsher treatment, spanning imprisonment, torture and execution. One of those was Chea’s mother’s former husband, a teacher who was killed because of his education qualifications.
By the time the Vietnamese army seized power from the Khmer Rouge in early 1979, nearly a quarter of Cambodia’s total population had perished in Pol Pot’s merciless pursuit of Communist utopia. By then, the country was in tatters and Cambodia would spend years trying to find its feet. The vast majority of its academic and professional community had been exterminated, sapping its capacity to make progress.
Chea’s father was one of the few educated people who managed to survive the Khmer Rouge. Although he had a degree in economics, he was able to fly under the radar because he came from a poor family. His own father, Chea’s late grandfather, had been a humble fisherman. After the Pol Pot period finally ended, Chanto and a few other surviving NBC staff came together and committed to rebuilding the central bank.
Then, in the early 1990s, after the negotiated withdrawal of Vietnam, the United Nations stepped in to help kick-start Cambodia’s rehabilitation, taking over its government and all administrative aspects of the independent state until elections could be held. The U.N. brought U.S. dollars with it, complicating the establishment of Cambodia’s own currency.
Fast forward to today and Cambodia is one of the most dollarized countries in the world. According to NBC, in December 2020, the official rate of dollarization in foreign currency deposits and broad money was 83.9%.
But unlike other highly dollarized countries, such as Zimbabwe and Ecuador, that introduced the dollar as a way to restore economic stability when their own currency was rapidly losing value, Cambodia’s dollarization was never in response to a hyperinflation event. As such, the dollar’s persistent dominance may have more to do with the country’s recent progress than the problems that gave rise to it.
Dollars for days
Pre-pandemic, Cambodia was one of the fastest-growing economies in the world. Averaging an annual growth rate of 8%, the nation managed to reduce its poverty rate from nearly half the total population in 2009 to 12.9% in 2018, and was well on its way toward its 2030 goal of a status upgrade from lower to upper middle-income country. Notably, the biggest revenue gains came from the tourism industry, where hoteliers to tour operators gratefully accept USD, as well as international exports, which are also mostly settled in dollars. This new prosperity gave rise to the local banking industry, which still caters mainly to foreigners given nearly 80% of the local population remains unbanked. In fact, only 22 out of 52 commercial banks are locally incorporated and even fewer were established by Cambodians.
In this way, imuch of Cambodia's success is thanks to dollarization. The dollar has attracted international investors, facilitated trade, reduced transaction costs (for foreigners, at least) and fostered stability, creating fertile opportunities within an otherwise fragile economy.
But it has also eroded sovereign power and left the country at the whim of the U.S. Federal Reserve, with limited control over its own monetary system, undermining the central bank’s ability to respond to economic shocks and financial crises as lender-of-last-resort – a major concern for Cambodia while the United States lets its own money printer go brrr.
For NBC, this is more than just macroeconomics. The riel is revered as an important national symbol of pride and sovereignty, and as such, reducing usage of the dollar is a matter of the highest priority.
This may also explain why Chea’s team sit firmly in the blockchain-not-bitcoin camp. NBC’s regulatory approach to cryptocurrencies is ambiguous. It issued a statement to confirm that doing anything crypto related without a license is illegal, but without providing guidance on how to apply for said license. With the domestic currency so weakened, the concern is that crypto is just another temptation for substitution.
The Financial Stability Board has drawn attention to similar risks posed by global stablecoins, such as diem (formerly libra), should they achieve considerable adoption. Likewise, any CBDC based on a major currency with sufficient credibility, such as the digital yuan, is stiff competition for the domestic currency of a poor country that relies heavily on inbound remittances.
In countries like Zimbabwe, a mix of hyperinflation, currency controls and political uncertainty have rendered the local currency useless. That’s why bitcoin has become attractive, notes Professor Douglas Arner, a law professor at the University of Hong Kong and a world-renowned digital currency expert.
In 2019, Zimbabwe took drastic steps to ban the U.S. dollar, along with a host of other foreign currencies, and gave the central bank powers to punish anyone found using anything other than the Zim dollar for domestic transactions. But this led to disastrous consequences for cashflow, and with inflation still raging, Zimbabweans were not content to sit by and watch their personal wealth evaporate before their eyes. An increasing number turned to bitcoin as a safer bet.
“The key to dealing with the challenge of currency substitution, whether it’s a global stablecoin or the dollar or another currency or something else, is having an effective monetary system,” says Arner, who spent the better part of 2007 in Cambodia as a consultant to the Asian Development Bank. “An effective monetary system is not just about stability, it’s also about usability, and usability is all about your payment systems,” he said.
With one U.S. dollar equivalent to 4,000 Cambodian riel, usability is where the riel falls down. This is why dollars are preferred, particularly in the urban areas, as you’d need to withdraw a comically large amount of physical riel to pay for anything more than your lunch. There is no coinage in Cambodia, so this strange dual currency system exists where the riel takes the place of small change.
Anything over a certain amount is conducted in USD, and under it, in riel. So theoretically, if the only thing stopping the riel from taking its rightful place is its physical awkwardness, this is a problem that could be solved digitally.
“Bakong highlights that if you can build a better system, then chances are, people will start using your own currency more,” says Arner, reiterating that an e-riel solves the inconvenience of having to carry around wads and wads of physical cash.
Additionally, it could help the poorest of the poor, who mostly earn in riel. It’s these communities that feel the pinch when merchants round up prices into dollars, while wages stay put.
A tokenomic take
When earlier strategies to de-dollarize Cambodia failed, academics wondered whether history might have a bearing.
A 2009 ADB report used the term hysteresis to describe physical systems affected by memories of the past. Originating from an Ancient Greek word meaning "lagging behind," the concept suggests that real economic systems can hold onto emotional baggage — even if the trauma that led to it dissolved long ago. Despite best efforts to move it in a different direction, the system keeps snapping back to old habits. In essence, hysteresis means history matters.
“[Cambodian] people are pretty used to using USD and thinking in USD,” said Makoto Takemiya, CEO of Soramitsu, the Japanese technology company that partnered with NBC to design and build Bakong.
“I think it’s hard to change that without some incentive structure to use the domestic currency,” he said, speaking from his home in Tokyo. Both e-riel and e-USD are available in the app.
Soramitsu put forward lots of ideas on how Bakong could be used to rig the riel, such as charging fees for anything in USD, while keeping transactions in riel free.
Or, NBC could run an airdrop-esque scenario like China’s lottery-style digital yuan giveaways.
Or the bank could do it how the Malaysian government did it, with a one-off payment of 30 Malaysian ringgit going to 15 million citizens to incentivise e-wallet set up.
Or how Elon Musk did it, when he paid $10 a pop to get new users and their friends to join PayPal.
But NBC didn’t want any of it, at least, not at the beginning.
“They are pretty conservative, they don’t really like to test with these variables,” said Takemiya.
It’s difficult to get sign off on radical ideas like Takemiya’s. Unlike agile startups that can move fast and break things, central banks are wildly different beasts, with deeply ingrained systems and processes that abhor change.
Plus, there are so many different decision-makers across so many different divisions, with layers and layers of hierarchy for would-be innovators to navigate. Takemiya says NBC’s IT and tech teams spent more than a year just to nail down all the requirements between the banking supervision and regulatory departments.
“The real champion of the project was, of course, Her Excellency Madam Serey Chea,” Takemiya says graciously. “She did a really great job pushing it down.”
Chea says some questioned her decision to work with Soramitsu, which is a small company only formed in 2016.
“We can’t afford the big companies and I’m not going to spend a lot of money on something that may or may not work,” she said. “And they know they had better perform because they are new, so we’re all in this together.”
It’s this willingness to do things differently, and to take risks, that has allowed this fearless explorer to successfully navigate strange and unfamiliar territories. She’s conquering some of her country’s toughest issues with an innovator’s mindset, a mother’s compassion and the passion for discovery of an astronaut.
Thanks to Rob Allen and Pete Ford for their help to review this article.
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