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Commercial banks and payment service providers (PSPs) can sleep easy, as the Swedish central bank’s latest tests show that the e-krona can be integrated into their systems, which reduces the chance of disintermediation or the need for a direct account with the Riksbank.
During the second phase of testing, the Riksbank has investigated whether and how an e-krona might function offline, whether the performance of the tested solution is adequate, and how banks and other PSPs could be integrated into an e-krona network.
The latter was undertaken in collaboration with Handelsbanken, one of the country’s largest retail banking providers, and Finnish software company Tietoevry.
According to the Riksbank, testing has shown that it is possible to integrate a potential e-krona into the internal systems the banks have today, and this would make it possible for their customers to exchange money in their bank accounts for e-kronor.
Speaking to VIXIO, Stockholm-based fintech consultant Jens Olsson said: “The ability for the e-krona to succeed could be dependent on market participants, banks and payment service providers. Ultimately, the e-krona will need to be distributed by payment service providers to the public in an attractive and appealing way.”
Therefore, e-krona needs to have a place in PSPs' business models, he continued. “As the market looks with interest on the developments, there is a strong case for the e-krona to succeed but it needs to be an open infrastructure that allows a wide range of payment service providers such as fintechs to be able to innovate and compete in this space.
“More specifically, payment initiation service providers could play an important role in making the e-krona successful,” Olsson suggested.
Offline transactions
The tests of the technical solution have also shown that it would be possible to make transactions using e-krona, even offline.
However, offline payments would entail some risks that need to be managed if a similar solution is to become a reality.
In particular, this was uncovered when testing out a wallet model that is based on end-users storing e-kronor in a local wallet on their mobile phone.
Such transactions would not be settled, and tests also showed that it is not always possible to get back locally stored e-kronor if a user loses their wallet.
Locally stored e-kronor should be considered as cash, and only held in limited amounts for use offline, the Riksbank has concluded.
Although it would be technically possible to minimise the risks, there are other risks associated with offline transactions, such as money laundering and criminal activity, which may require restrictions.
The project has also investigated the legal questions surrounding a potential e-krona. For instance, it has examined what type of asset an e-krona would be. The conclusion is that it could be regarded as an electronic form of cash.
The e-krona pilot project aims to increase the Riksbank's knowledge of how an e-krona could be designed and how it would function.
The work is now entering into Phase 3, which will investigate the requirements made of a future e-krona, among other issues.
Some industry concerns
In spite of the enthusiasm that the Riksbank has approached the issue with, parts of the industry remain sceptical about some of the decisions being made.
Rickard Eriksson, who works with the Swedish Bankers' Association, has taken issue with the fact that the project wants to use distributed ledger technology (DLT).
"To me, it seems like the use of DLT doesn't add anything. They are making the current thing that the current system is doing but in a more complicated way,” he said. “It is a peculiar choice of technology so far, I don't see how it would be an innovation. Rather, it is just a central bank doing what private banks do.”
If DLT would add something to retail payments, why would the market not undertake this themselves, Eriksson added. “There is lots of hand waving regarding exactly what an e-krona would add, but very few concrete suggestions."
Although Sweden’s government has tentatively welcomed the Riksbank’s work so far, some criticism of the e-krona has come from Sweden’s Financial Supervisory Authority, the Finansinspektionen.
In previous interventions, the authority has said that it felt that the analysis carried out by the Riksbank should have been based on an unbiased investigation of how to solve the potential problems that might arise if the marginalisation of cash continues, instead of focusing solely on the e-krona as a potential solution.
Sweden’s business lobby, the Confederation of Swedish Enterprise, has also been sceptical about new state interventions in the economy and has said that private business will be able to manage the issue more effectively than the Riksbank.
No decision has yet been taken as to whether to issue an e-krona or on what technical solution or legal framework it might be based.
A review is currently being undertaken by Sweden’s government, with findings due to be published by the end of 2022.
