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Leading in central bank digital currency (CBDC) experimentation, Sweden’s e-krona study is focusing on peer-to-peer (P2P), person-to-business (P2B) retail payments while the country is considering the possibilities of potential offline use and paying interest on digital fiat deposits.
Riksbank was among the first central banks to start analysing the possibility of a CBDC five years ago as a result of a significant shift away from the use of cash. The bank wanted to ensure that consumers had the means to save and use “risk-free central bank money” outside of private banks and that an alternative was available so that vulnerable consumers would not be excluded from the financial system because they could not access physical cash.
Although there have been significant developments in issuing CBDCs on a global scale since 2016, Sweden has remained at the forefront of the experimentation of digital fiat.
It is currently examining the technical aspects of an e-krona. The first phase of their experimentation is centred around the concept of building a model that could handle 100,000 simultaneous users, with each payment taking no longer than a second. A second phase of the e-krona project will then address practical issues.
“Our current thinking is that the e-krona would primarily target the person-to-person and person-to-business segments of the retail payments market,” the central bank told VIXIO.
In this setup, Riksbank would operate the core infrastructure and private-sector actors would act as intermediaries.
Riksbank has already produced the first proof of concept using a card, smartphone and smartwatch for payment initiation, it said, adding that it is now working with two market actors on how this specific solution can be integrated into their IT-systems.
The e-krona would have its own core infrastructure and could in that way contribute to increased resilience, the central bank said.
Riksbank has been engaged in various international working groups and cooperated with other central banks. Through these discussions, they shared with VIXIO their three fundamental principles for a CBDC:
- Do no harm: do not undermine monetary policy or financial stability.
- Co-existence: the e-krona should coexist with other types of private and public money such as bank deposits and cash.
- Efficiency and innovation: the e-krona should support efficiency and innovation in the payments system.
Next steps
In April, Riksbank revealed that it has been working on finding solutions to certain privacy concerns, especially in payment transactions when payment firms are able to see a customer’s entire transaction history, as well as the history of the transferred token.
The Swedish central bank said at the time it was “analysing to what extent the information stored in the transaction history can be regarded as information covered by banking secrecy and whether it comprises personal data”.
The central bank has started to look into privacy aspects but “it is still early days,” Riksbank said, adding that it thinks "this is something that will get more attention in the future”.
The bank also confirmed that it is investigating technologies that allow e-krona payments to take place offline, such as in face-to-face situations similar to those where cash is used.
To spur public demand, it is also considering offering interest on e-krona deposits, a possibility that some fear might shake the current banking system by driving masses away from retail banking.
Nonetheless, the central bank confirmed that “issues relating to financial stability” is also on its agenda.
The golden question
Sweden is one of the most cashless places on earth. When Riksbank first began investigating the potential of a CBDC, it reported that cash declined from 40 percent of all payments in 2010 to just 15 percent by 2016. Cash has continued to decline in the interim period, accelerated further by the COVID-19 pandemic, and estimates suggest that, currently, it is well below 10 percent.
At the time of this early exploration, reports of reduced cash handling services from both banks and retailers raised concerns among policy makers. This was partly addressed in November 2019, when the Swedish Riksdag adopted legislation which required the six largest banks in Sweden to provide certain cash services throughout Sweden from January 1, 2021 onwards.
Nevertheless, Riksbank made clear to VIXIO that any CBDC it issues would not be a cash replacement, but rather, “the e-krona should be seen as a complement to cash".
Despite the long-running experimentation, the Scandinavian central bank has not yet taken a decision on whether to issue an e-krona, nor on the technical solution that it would use.
“Although the issuance of an e-krona can be seen as fulfilling the Riksbank’s obligation to supply banknotes and coins with new technology, it is clear that the e-krona addresses broader issues about the state’s role in the payment and monetary system,” Cecilia Skingsley, Riksbank’s first deputy governor, said in a speech last week.
To better understand the Riksbank’s mandate regarding the e-krona, the central bank has requested clarification from legislators. An experts’ committee is expected to release a report in that regard next November.
“In essence, a decision to offer e-krona will make sure that the citizens of Sweden continue to have access to risk-free Swedish kronor for payments in the future,” Skingsley concluded.
