Nordics Take Differing Approaches To CBDC Race

March 1, 2022
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After Sweden’s Riksbank took its e-krona act one step further last week, VIXIO spoke with neighbouring central banks about their stance on central bank digital currencies (CBDCs).

After Sweden’s Riksbank took its e-krona act one step further last week, VIXIO spoke with neighbouring central banks about their stance on central bank digital currencies (CBDCs).

On February 22, Sweden's central bank, the Riksbank, announced that it has completed phase two of its e-krona project and was progressing to the next stage, with the findings due to be published in a report this spring.

The focus, going forward, will be on using the lessons learned from analyses and technical tests to formulate the requirements for a possible e-krona.

“In phase 3 we will begin to formulate a basis for the requirements for an e-krona if a decision is made to issue it,” said Mithra Sundberg, head of the e-krona division at the Riksbank.

She added: “All the tests, analyses and investigations carried out will form a base for this work. We will also draw on experience from the rapid international development that is now taking place in this field.”

In the technical tests during phase two, the Riksbank examined issues such as offline function, performance and integration of external participants, such as a bank, into the e-krona network.

CBDCs beyond Sweden

Sweden was one of the first countries around the world to begin investigating a CBDC, long before the ill-fated Facebook Libra project jolted many central banks into action.

The Riksbank started the e-krona project in 2017 to analyse the need for an e-krona and, in 2020, an inquiry was launched by the Swedish government into the state’s role in the payment market and the need for central bank digital currency.

Yet, caution about launching an e-krona has meant that Sweden has fallen behind in the so-called CBDC race.

Other central banks have caught up, such as the European Central Bank, which oversees the currency of Sweden's Nordic neighbour Finland, as well as the Bank of England.

Some have even surpassed the Riksbank, such as China, Jamaica, Nigeria and the Bahamas.

Norway’s CBDC project, meanwhile, began to come to fruition in 2016, its central bank told VIXIO. “It is a priority for Norges Bank,” said Knut Sandal, who is heading the project.

“The project is now in a phase where we do experimental testing of technical solutions and further analysis of purposes and consequences of introducing a CBDC. This work is intended to provide a basis for deciding whether Norges Bank will test a preferred technical solution,” continued Sandal, adding that any decision to introduce a CBDC will also require a political mandate.

The CBDC project is now in a phase in which Norges Bank will undertake experimental testing of technical solutions along with selected suppliers and other cooperation partners, he continued. “We also have a continuous dialogue with relevant stakeholders, the financial industry and fintech firms, as well as other central banks and international organisations including the newly established Nordic BIS Innovation Hub.”

Iceland, meanwhile, is in the early stages of CBDC exploration.

“The priority of the Central Bank of Iceland currently is to follow closely CBDC research and pilot projects of leading central banks, BIS, and others, analyse potential policy goals and associated trade-offs,” said a spokesperson for Iceland’s central bank, adding that work in relation to a potential issuance of a retail CBDC is in its exploratory stage.

Although Danmarks Nationalbank did not respond to VIXIO’s requests for comment, the Danish central bank, for now, looks as if it is not considering a CBDC.

In 2016 and 2017, it conducted research on digital currencies, but ultimately determined that it would pose significant legal, financial and administrative challenges, and have no clear benefits for the Danish society.

However, local press reports suggest that the central bank does have an interest in exploring the development of a wholesale CBDC.

This stance has been greeted by the country’s key financial lobby, Finans Denmark, which told VIXIO: “We are confident with the work done by the Danish central bank, and we aren’t concerned falling behind other countries like Sweden and the Eurozone.”

“In alignment, we regard the Danish payment infrastructure to be robust, secure and effective and having an already well-functioning digital currency, in the form of bank deposits,” continued Michael Busk-Jepsen, director of digitisation at Finans Denmark.

Therefore, it is difficult to see what a retail central bank digital currency in Denmark would be able to contribute that is not already covered by the payment solutions which already exist today, he said.

Financial access questioned

The confirmation that the Riksbank is moving onto the next phase of its CBDC project came at the same time as a report from the country’s Post and Telecoms Agency (PTS), which expressed concern that digitisation may mean that consumers are not able to access basic payment services.

“PTS can state that digitalisation in the payment area has now been developed so that people's access to goods and services can no longer be ensured solely through traditional payment services,” the PTS pointed out.

The authority has concluded that increased efforts are needed by the government and regulators to help people into digital payment services in order for access to basic payment services to be satisfactory.

In the report, PTS shows that access to basic payment services is vulnerable, listing a number of examples from 2021.

During the year, the number of bank branches continued to decrease, which affects the ability to pay bills over the counter.

The PTS also said that local government services are warning that it is becoming increasingly difficult to establish state-funded payment service representatives.

The reason is that there are few financial incentives, at the same time as it means an increased security risk and workload to be a payment service representative, the agency pointed out. “PTS considers that there is reason to consider the consequences that a continued settlement of bill payment with manual support may have.”

Cash use has become increasingly rare in Sweden. A Riksbank report last year noted that in 2020 only 9 percent of the population paid for their most recent purchase in cash.

According to a survey by the Government Offices of Sweden, half of the Swedish population has reduced its use of cash over the past year, which is primarily due to digital alternatives being perceived as simple and efficient.

During the same period, 40 percent of Swedish consumers opted to use the Swish app, a mobile payment system, typically used for person-to-person payments, although it is increasingly used for paying businesses and merchants.

A similar revolution has taken place throughout the Nordics. A 2019 study by J.P. Morgan, for example, found that Norway has the highest penetration of e-commerce-enabled debit and credit cards (2.92 per person) out of the countries surveyed. In spring last year, Norges Bank said that the share of cash payments in Norway is now probably the lowest in the world.

South of Sweden and Norway, 88 percent of payments in brick and mortar commerce are made digitally, it emerged this week in the Danmarks Nationalbank payments report.

Out of this, one in five digital payments are made using a mobile, while two-thirds of person-to-person payments are processed using instant payments.

Last but not least, in Iceland, a spokesperson for the central bank told VIXIO that about 90 percent of the country’s domestic retail payments are digital. “COVID-19 has impacted payments by further increasing the use of contactless technology.”

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