Comment on “Design of CBDC in a Highly Dollarized Emerging Market Economy: The Case of Cambodia”

Abstract

According to a survey of 81 central banks conducted by the Bank for International Settlements (BIS) in 2022, 93% of the surveyed central banks were exploring Central Bank Digital Currencies (CBDCs), with half developing or running concrete experiments. CBDCs will likely reshape the financial landscape across the globe. Ueda and Hay's (2024) study of Cambodia's Bakong, which was officially launched in October 2020, offers a rare opportunity for understanding the operation and implications of one of the world's first operational CBDCs.

The Cambodian case appears to be unique in a number of ways. On the one hand, while most central banks focus on one of the two key functions of the CBDCs, retail or wholesale, the National Bank of Cambodia (NBC) emphasized both functions. On the other hand, in addition to creating digital wallets for the Cambodian Riel, the NBC also created digital wallets for the US dollar.

The NBC announced three key goals when launching the Bakong: reducing dollarization; preventing the spread of the COVID-19 pandemic; and promoting efficiency, resilience, and inclusion. If the way to achieve this is through the substitution of cash payments by digital payments using the CBDC, then it is not immediately clear how a reduction of dollarization happens as a result of introducing the CBDC. As Ueda and Hay (2024) point out, the impact on efficiency and resilience is less clear.

The existing literature shows that the effects of CBDCs on financial efficiency, financial stability, market competition, and social welfare depend largely on the designs of the CBDCs and market conditions. For instance, adoption of the CBDCs may enable central banks and regulators to monitor risks in real-time and take actions in a timely fashion. However, the CBDCs may also make bank runs happen faster. Whether the CBDCs would improve or deteriorate financial stability depends on the interaction between these two forces.

According to surveys by Ueda and Hay (2024), the adoption rate of the Bakong among shops is extremely low, lower than not only ABA Pay and Acleda Pay but also Alipay. This is not surprising because the additional value offered by the Bakong, on top of existing mobile payment services, is very limited. Ueda and Hay (2024) point to network effects as a potential reason for the low adoption rate.

CBDCs have one important advantage, compared to privately run digital payment services, as they are legal tenders, that is, digital forms of sovereign currencies. They should be, in theory, safer, although the difference is probably not visible during normal times. For this reason, it is strange that the NBC is inclined to deny that the Bakong is its liability. The Bakong or digital Riel should be issued by the NBC through a two-layer system—the central bank issues the CBDC to participating banks, which, in turn, issue the CBDC to the public. The purposes of this two-layer system include lowering the central bank's burden in dealing with the public directly and reducing the risks of bank disintermediation.

A low adoption rate of the Bakong is not necessarily a concern, as long as the privately run payment services remain active. The existence of the CBDC as an alternative payment tool provides an important function of “contestability,” ensuring financial inclusion and reducing monopoly behavior in the private payment sector.

A more important aspect to look at is whether or not the introduction of the Bakong improved efficiency at the wholesale level. In most countries where wholesale electronic payment systems are already well developed, the additional benefits of having an CBDC would also be limited. From the current paper by Ueda and Hay (2024), however, the answer is unclear.

Ueda and Hay (2024) raise many concerns about the negative impacts of the CBDC on the economy and financial system. These definitely deserve further analysis and policy attention. However, many of the risk factors raised can be addressed by appropriate policy arrangements. For instance, Ueda and Hay are worried that the introduction of the CBDC could lead to disintermediation of the banks and hurt the economy due to reduced loans. These, however, are not the only likely outcome. If there is no interest payment on CDBCs, then the incentive for depositors to convert their deposits into CBDCs would be limited. Even if some deposits leave the banking system, the banks can still borrow from the financial markets to support their lending businesses.

It is somewhat strange that the NBC created digital wallets for both the Riel and US Dollar if one of the purposes is to reduce dollarization. But if the economy is already dollarized, to a large extent, then the additional financial risks, which Ueda and Hay (2024) warn us about, should be limited. Perhaps the NBC should pay more attention to questions about how to use the CBDC to promote financial inclusion, that is, encouraging its use by low-income and less educated people and improving the efficiency of cross-border transactions.