To Succeed, Digital Financial Tech Must Be Tailored to Suit Public Needs

The relative success of Cambodia’s Bakong system highlights that central bank digital currencies can become more than just interesting experiments.

May 29, 2023
The digital currency Ripple is represented in this photo illustration. (Jakub Porzycki/NurPhoto via REUTERS)

Central bank digital currencies (CBDCs) have, so far, largely failed to gain significant traction in the countries where they have been launched. In Nigeria, the largest economy to have ventured a CBDC as part of an ambition to go cashless, the move has resulted in chaos.

But the relative success of Cambodia’s Bakong system highlights that such projects can become more than just interesting experiments, if they’re seen to fill a real consumer void and can win public trust.

Nigeria is the largest economy to have fully launched a CBDC as yet. The Central Bank of Nigeria (CBN), like most central banks, aims to promote the use of its own currency within the country. This is difficult because of the instability of Nigeria’s currency, the naira. Nigerians often prefer to use US dollars or the West or Central African francs used in neighbouring countries (which are pegged to the euro). Nigeria also has one of the world’s highest rates of cryptocurrency use, with close to one-third of Nigerians having owned or used cryptocurrency in 2020.

An unusual twist is that the central bank has also, since 2012, been trying to push Nigeria toward a cashless society, believing this will boost the economy. The eNaira CBDC was portrayed as helping push this policy forward when it was launched in 2021.

Nigeria’s Cash Chaos

In December 2022, the CBN announced redesigned banknotes and set a date of January 31, 2023, for demonetizing the older notes. However, a shortage of the new offerings resulted in chaos, with the switchover extended to February 10 after a court ruling. On February 8, BBC News reported “fights at ATMs, protests and mob attacks on commercial banks” as the deadline loomed and the cash shortage persisted. Banks encountered long queues of people still reliant on physical naira waiting for hours. Economic activity seized up as people struggled to find the cash to pay for basic goods or transportation.

The unpopularity of the CBDC was even more glaring as, despite these strong incentives to begin using the eNaira, Nigerians apparently preferred to launch court challenges and demonstrations against the CBN’s policy. Under duress, eNaira use climbed to the equivalent of US$48 million during the turmoil between January and March 2023. Still, that was a tiny 0.5 percent of Nigeria’s economic output. It’s likely that the situation prompted even more Nigerians to turn to the volatile, fraud-prone cryptocurrency realm — ironically, a problem for which CBDCs aim to provide a reliable, public solution.

But while the drive for digital payments has gone poorly in Nigeria, there is no inherent reason the concept cannot succeed. Electronic money transfers through cellular phone networks first took off in Kenya, where the M-PESA mobile payment service has existed since 2007. There is also a positive model in Cambodia. That country’s Bakong system is perhaps the most successful example of a central bank introducing new digital payment methods based on digital ledger technology.

The divergent receptions of CBDCs in Cambodia and Nigeria highlight some key lessons. The first is that, like new technology generally, success does not depend on an innovation’s technological sophistication or capability.

Bakong: A (Relative) Success

In 2022, Bakong processed transactions worth US$9.6 billion — roughly 35.6 percent of Cambodia’s GDP. Although still small, this is a solid niche, tens of times larger as a share of the country’s economy than what has been gained by any other CBDC project so far.

In contrast, less than one percent of Nigerians have an eNaira account, and this low usage is typical for most existing CBDC projects. Despite frenzied speculation about the prospects of China displacing the US dollar with the digital renminbi (the world’s largest pilot CBDC project, with more than 260 million registered users), that system as of December 2022 processed just US$14 billion — a tiny portion of China’s economic activity. To put it in perspective, this means that in two years the digital renminbi system has processed the equivalent of two days’ worth of online retailer Alibaba’s sales during the country’s busiest shopping event. The other fully launched CBDCs in the Caribbean, most notably the Bahamas Sand Dollar and the DCash system of the Eastern Caribbean single currency, are also barely used.

Why has Bakong been relatively successful? One reason is that its architects haven’t tried to force policy goals onto Cambodians. Although the country’s central bank is no different from others in wanting to promote the use of its national currency, it seems to be taking a much more gradual approach. Most importantly, it accepts and works with current user preferences to hold and transact in US dollars. Bakong has also been framed by its architects as improving the country’s payment system rather than as a CBDC for its own sake.

Hence, user convenience has been an important focus, such as through a QR code system, which offers an experience similar to contactless credit cards. Cambodia’s central bank is also working to expand consumers’ ability to send remittances from other countries. International money transfers are both an area of high fees and an important source of capital for developing countries, and thus one area where CBDCs could have significant benefits. But any rundown of technical features can obscure the more important point: this offers something people want and didn’t previously have access to.

There are also infrastructural differences: Cambodia has significantly higher availability and use of mobile internet services than does Nigeria. Cambodia’s smartphone penetration is estimated at 39 percent compared with 10 to 20 percent in Nigeria. Yet Nigerians are among the world’s top users of private digital currencies. This suggests lack of access to technology is less of a factor in the eNaira’s low acceptance than its implementation in ways that did not respond to the public’s needs, by institutions with low levels of public trust.

Lessons from Early Adopters

The divergent receptions of CBDCs in Cambodia and Nigeria highlight some key lessons. The first is that, like new technology generally, success does not depend on an innovation’s technological sophistication or capability.

While CBDC advocates are optimistic about the possibilities they offer to optimize economic management and improve payment systems, few people are interested in the technology for its own sake. What’s more important, beyond meeting basic technical requirements, is that a given technology meets a public need. Too many CBDCs to date offer too few compelling benefits that users can’t obtain through existing technologies such as credit cards.

Policy makers should also avoid a technocratic disdain for cash. Cash use is declining in high-income countries but only because of public preference in a context of reliable digital payments run by (mostly) trusted companies and institutions. In Nigeria, the public seems unconvinced by ambitions for a cashless economy. Trust in the government institutions promoting this are low. Data from a Wellcome poll in 2020, reported by Our World in Data, showed 23 percent of people in Nigeria trust their government, versus 83 percent in Cambodia.

Finally, no CBDC can be more attractive than the currency on which it is based. No degree of technical sophistication could allow the eNaira to overcome the problem of low trust in the base currency itself as a store of value.

The fact that Nigeria has one of the world’s highest rates of cryptocurrency use is symptomatic of this fundamental problem; it’s not a sign that Nigerians will be keen to use any digital currency that comes along. Conversely, Cambodia’s Bakong probably would not have had much success if the system had only allowed payments in Cambodian riel rather than allowing users to transact in US dollars.

More broadly, rivalries between digital dollars, euros or yuan will not be settled by a CBDC’s technological features. The outcome, as always, will depend on public confidence in the currencies themselves.

The opinions expressed in this article/multimedia are those of the author(s) and do not necessarily reflect the views of CIGI or its Board of Directors.

About the Author

Colin Chia is a Social Sciences and Humanities Research Council Postdoctoral Fellow in the Department of Political Science and Balsillie School of International Affairs at the University of Waterloo in Ontario.