Asian Countries That Really Need a CBDC

At the recent Singapore Fintech Festival, the city-state’s announcement that it would pursue a wholesale central bank digital currency (CBDC) pilot next year was big news, and rightly so. As a key financial center in Southeast Asia, Singapore’s monetary policy decisions typically have regional implications.

The pilot project will aim to assess whether a digital fiat currency could help Singapore increase the efficiency and speed of payments while reducing costs. While these are important considerations, the reality is that Singapore, like many developed economies, does not need a CBDC. It is a wealthy country in which almost every adult has a bank account. Its digital financial ecosystem is advanced. For Singapore, a CBDC is “nice to have”.

The same cannot be said of several of its neighbors: Cambodia, Laos and Myanmar. These developing countries could all benefit significantly from a digital fiat currency, and Cambodia already does.

Bakong Project

Cambodia quietly made history three years ago with the launch of its retail CBDC project Bakong, developed by Japanese blockchain company Soramitsu. In retrospect, the launch of Bakong was a bold move that established Cambodia as a CBDC pioneer alongside China and the Bahamas. During its three years of operation, Bakong has attracted 70 financial institutions as members, of which 49 are active. From January to June 2023, the Bakong payment system recorded more than 35.4 million transactions, worth more than $12 billion.

Soramitsu should be credited for developing the blockchain infrastructure to power Bakong, but the kingdom’s pressing needs for financial inclusion are just as important to the success of Cambodia’s digital fiat currency. it is estimated that 70% of the 17 million inhabitants are unbanked – and an underdeveloped digital payments ecosystem – unlike, say, China or India, where existing payment rails are so efficient that it’s unclear how a CBDC can improve them, and people not banked people constitute a minority rather than the majority of the population.

Sanzhar Abdullayev, head of cards and electronic payments at ABA Bank, said in August that Bakong “has made a significant impact on financial inclusion” by providing a simple, convenient and secure basis for transactions and payments in Cambodia and abroad. the foreigner. “We are optimistic about its further development,” he said, adding that ABA Bank had been a member of the Bakong project since August 2020, a few months before its launch.

The digital kip

Given Laos’ low GDP per capita of $2,500 and large unbanked population – fewer than 30% of Laotians have a bank account – this landlocked Southeast Asian country could reap clear benefits of a CBDC. Indeed, during the pandemic, Laos encountered certain problems due to its cash-dependent economy. For example, it has struggled to distribute cash aid to people recorded largely in paper family records. A CBDC could help the Laotian government improve aid distribution and, more broadly, improve financial inclusion and payment efficiency.

In February, the central bank of Laos began testing a proof-of-concept CBDC (DLak) as part of its research into the potential issuance of a digital kip. During the pilot, the central bank issues DLak in exchange for fiat currency, which can then be obtained by individuals through commercial banks. To make purchases, users use a QR code and app provided by participating sellers. Transactions made using DLak will be instantly converted into physical currency by a commercial bank, allowing sellers to receive payment in real time.

Meanwhile, Soramitsu plays a key role in the Digital Kip pilot project. He said the DLak results “will influence and be a prerequisite” for the Lao central bank to consider formally launching a CBDC. If Soramitsu were to implement a similar version of the Bakong project in Laos, having the same CBDC infrastructure could facilitate seamless cross-border payments between Laos and Cambodia.

The DMMK

For Myanmar, a CBDC would also be very beneficial given its large unbanked population and low GDP per capita. However, given the country’s political challenges, the rollout of the Digital Myanmar Kyat (DMMK) is unique. Rather than Myanmar’s central bank, it was the country’s former democratically elected government, the National Unity Government (NUG), now in exile, which launched the DMMK in 2022 with the aim of creating its own digital financial rails capable of bypassing the country’s junta-controlled banks. DMMK is used through an electronic wallet called NUGPay.

It seems that the DMMK is enjoying quite good popularity so far. In June 2023, NUGPay released its first annual report indicating that total in-app transactions had exceeded 300 billion kyats (around $150 million).

It is conceivable that Myanmar could have more than one CBDC, as the ruling junta stated in February 2022 that he was looking to launch his own digital kyat. Deputy Information Minister Major General Zaw Min Tun said at the time that a “digital currency would help improve financial activities in Myanmar.”

It’s all about financial inclusion

Overall, we are optimistic about the prospects of CBDCs to drive financial inclusion in Cambodia, Laos and Myanmar – although in the case of the latter, uncertainty over its political stability could hamper adoption widespread of the DMMK. These three countries, given their relative lack of industry, underdeveloped infrastructure and small economies, have not reaped the same benefits from previous waves of financial digitalization as their neighbors. In every country, a CBDC can play a positive role in establishing a strong digital financial infrastructure and attracting many more people into the formal financial system, thereby helping to reduce poverty.

There are also signs that a CBDC could strengthen connectivity between these countries’ financial systems and the international community. Case in point: Alipay+ and Project Bakong announced their partnership that will allow Chinese visitors to Cambodia to make payments with their Alipay wallets, while users with Bakong wallets fully linked to the KYC bank will be able to pay abroad at merchants linked to Alipay+. Additionally, given the close economic ties between China and Laos, it is conceivable that if a digital kip is launched, it will also be linked to Alipay+.

Looking ahead, we expect to see growing use of Bakong in 2024, with the possibility of more cross-border payment links, greater clarity around the digital kip – including a possible launch date – and continued adoption of the DMMK. These developments in emerging Southeast Asia may be less headline-grabbing than when advanced economies make announcements about their respective CBDC progress, but their implications for strengthening financial inclusion are much more striking.