E-krona project, report 2
Cash use continues to decline in Sweden. In future, cash may be so marginalised that it becomes difficult to use as a means of payment. For 350 years, the Riksbank has provided the general public with money but going forwards, the technical development and digitalisation of payments will bring the issue of the state’s role to a head. If the marginalisation of cash continues a digital krona, an e‐krona, could ensure that the general public still has access to a stateguaranteed means of payment. Alternatively, not to act in the face of current developments and completely leave the payment market to private agents, will ultimately leave the general public entirely dependent on private payment solutions, which may make it more difficult for the Riksbank to promote a safe and efficient payment system.
Central bank digital currencies (CBDC) are a new and relatively unexplored area that is currently being analysed by several central banks around the world. Adopting a position on whether Sweden should introduce an e‐krona will take time. The analysis needs to continue so that we increase our knowledge about the consequences and effects of an e‐krona. At the same time, technical solutions have to be devised so that an e‐krona can be developed and tested. In this report, the Project proposes that the Riksbank begin to design a technical solution for an e‐krona in order to test which solutions are practical and possible to realise. In addition, the project suggests that the Riksbank draw up proposals for legislative amendments that are needed to clarify the Riksbank's mandate and an e‐krona's legal standing.
The use of cash continues to decline
According to the Riksbank's survey from 2018, only 13 per cent paid for their most recent purchase in cash. The corresponding figure for 2010 was 39 per cent. As more consumers turn to electronic payments, it will ultimately no longer be profitable for retailers to accept cash. If the trend continues, Sweden may find itself in a few years' time in a position where cash is no longer generally accepted by households and retailers.
The state needs to have a role on the payment market
For a long time, the state has provided the general public with banknotes and coins to use for payments. Cash has enjoyed the confidence of the general public and facilitated trade in goods and services. Today's digital payment market means that we face a new situation in which all means of payment accessible to the general public are issued and controlled by private agents. If the state, via the central bank, does not have any payment services to offer as an alternative to the strongly concentrated private payment market, it may lead to a decline in competitiveness and a less stable payment system, as well as make it difficult for certain groups to make payments. Ultimately, it may also risk eroding basic trust in the Swedish monetary system. Some of these problems could be neutralised or mitigated by an e‐krona.
What can an e‐krona provide?
The e‐krona could become a modern krona in electronic form as a complement to physical cash. The public could then continue to have general access to central bank money. The e-krona could also strengthening preparedness, as the private market cannot be expected to take all the responsibility for ensuring that payments function in crisis situations. In serious crises, when private payment systems may fail, an e‐krona could work as an alternative system and thereby increase stability in the payment system as a whole. The e‐krona could hence help to promote a safe and efficient payment system.
The e‐krona could offer a competitively neutral infrastructure which payment service providers can join if they wish to offer services to households and companies. This could increase competition, benefit innovation and possibly slightly reduce the fees charged to the general public.
There are currently groups in society that are encountering problems as cash use declines because they find it difficult to use digital payment solutions for one reason or another. Such groups include older people, people with disabilities or those who, for different reasons, do not have access to payment instruments other than cash. Since it cannot be expected that the private market fully cater for these groups, the state can choose to take greater responsibility for them by. This could for example be done by designing a simple and userfriendly e‐krona or by legislating and regulating so that the private sector is forced to take greater responsibility.
The e‐krona – value‐based or account‐based
E‐krona can be described as Swedish krona that can either be held in an account at the Riksbank (account‐based) or be stored locally, for example on a card or in a mobile phone app (value‐based). Both types of e‐krona assume that there is an underlying register so that it is possible to record transactions and safeguard who is the rightful owner of the digital krona. This means that digital transactions with e‐krona will be traceable.
For it to be practically possible to use e‐krona for online purchases or in physical shops, the e‐krona platform, which contains the underlying register for e‐krona, needs to interact with a number of other systems and agents. Banks and other companies, for example, need to be able to join the e‐krona platform in order to be able to develop and offer payment services to households and companies. Systems are also needed that enable money laundering checks and a link to a settlement system so that e‐krona can be moved into and out of the platform.
Legally speaking, a value‐based e‐krona is classed as e‐money, while an account‐based e-krona can be likened to a deposit. E‐krona could be offered in the same way as cash is today and be widely available to households and companies (regardless of domicile). However, an application to open an e‐krona account may need to be assessed based on established rules and conditions just as when a bank account is opened at a private bank.
The Project's assessment is that the introduction of an e‐krona is compatible with the Riksbank's task to promote a safe and efficient payment system. Its design affects the need for amendments to the Sveriges Riksbank Act, however. A value‐based e‐krona is considered compatible with the Sveriges Riksbank Act, but in order for the Riksbank to have a clear mandate to issue an account‐based e‐krona, the Act needs to be adapted. The Project proposes that the Riksbank start an inquiry to draw up concrete proposals for the amendments that need to be made in order to provide the Riksbank with just such a clear mandate.
The demand for e‐krona determines the consequences for monetary policy and financial stability
How monetary policy and financial stability will be affected by the e‐krona depends on how large demand for an e‐krona will be. The demand depends in turn on how the e‐krona is designed. The conclusion in the report is that if the e‐krona were to be in substantial demand and be widely available, it would be beneficial to control its demand. Interest rate could in this case be one among other possible tools to limit possible negative effects on the efficiency of monetary policy and financial stability.
If demand were to be small, the effects on the financial system would be minor. Banks might perhaps receive slightly fewer deposits and therefore have to obtain slightly more wholesale funding. In times of financial unease, when the public may wish to withdraw large amounts from weak banks, the e‐krona could make the run from the banking system to stateguaranteed money both easier and quicker than a traditional run from the banking system to cash. However, the Riksbank already has tools to be able to cope with such situations if they were thought to pose risks to financial stability.
The Project proposes that the Riksbank build a technical solution for a value‐based e‐krona
The Project proposes that the Riksbank initiate a pilot programme to develop one or more possible technical solutions for a comprehensive e‐krona concept that provides the Riksbank with greater room for manoeuvre and knowledge prior to a decision on whether to issue an e‐krona or not. The proposed focus of this programme should be on developing an e‐krona that constitutes a prepaid value (electronic money) without interest and with traceable transactions. An account‐based e‐krona requires coordination with other central agencies. It is therefore reasonable for any e‐krona system for account‐based krona to be built in agreement, and perhaps even in partnership, with other agencies. A Swedish position on digitalisation on the payment market should also be drafted. The project proposes that the Riksbank initiate cross‐agency dialogue in this issue.