The National Bank of Cambodia (NBC) developed the Bakong system along with Japanese technology company Soramitsu using the open source Hyperledger Iroha blockchain framework. The flexibility of using a blockchain for digital asset management allowed NBC and Soramitsu to implement fiat-backed digital representations of the Khmer riel and US dollar that would be accessible for wholesale interbank transactions as well as everyday retail payments.
The core of the system is run by NBC, which delegates the running of ‘payment gateways’ to financial institutions. End users, such mobile app users, connect to the system via these payment gateways. All the transactions are stored as a chronological chain of records, also known as a blockchain, which is replicated across multiple servers. Unlike most commonly used permissionless blockchains, such as Bitcoin, the Hyperledger Iroha-based Bakong system does not rely on mining for finalizing transactions, but rather uses a voting method, wherein a supermajority of servers that maintain the blockchain vote to finalize transactions that are arranged in blocks.
The NBC Bakong core system is geographically distributed and contains all transactions, but no personally identifiable information (PII). Rather, all end-users’ PII is stored by the financial institutions that join the system. In turn, financial institutions only receive transactions on which their users are counterparties, and do not have access to all transactional data in the system. It is this separation of data that helps to preserve the privacy of users, while still allowing for the central bank to view all transactional activity and consider these data to improve their monetary policy. Thanks to the inherent security features of the blockchain and the associated ledger copies, the risks of fraud, hardware failure, tampering, and, most importantly, cyberattacks are mitigated.
What are the benefits?
Cost reduction and user inclusivity are the most important benefits of this system. By unifying banking processes under Bakong, the costs and fees associated with interbank transactions are reduced to a minimum and transactions by end users are currently free. As long as banks and financial services continue to carry out their due diligence through the implementation of ‘know your customer’ (KYC) and other security measures, financial crimes can be avoided. Indeed, the permanent digital record of all transactions makes payment systems like Bakong easily auditable and thus unsuitable for criminal activity.
Bakong also boosts user inclusivity by helping to integrate people into the financial system. Easy-to-use digital tools and nearly nonexistent transaction costs incentivize users to take part in and contribute to the system. Payments become as simple as scanning a QR code, and – depending on the amount transacted – user verification can be done through an SMS (although larger amounts would require ID verification by a financial institution).
Bakong system
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