Riksbank preparing for life after physical cash - Capital Economics
Nordic & Swiss Economics

Riksbank preparing for life after physical cash

Nordic & Swiss Economics Update
Written by David Oxley

While the Riksbank’s plans for an official digital currency are still in the early stages, we think it is more likely than not that it will launch the e-krona by the mid-2020s. Moreover, we suspect that it will opt for a design which has the potential to supercharge its ability to boost the economy in future downturns.

  • While the Riksbank’s plans for an official digital currency are still in the early stages, we think it is more likely than not that it will launch the e-krona by the mid-2020s. Moreover, we suspect that it will opt for a design which has the potential to supercharge its ability to boost the economy in future downturns.
  • To paraphrase ABBA, cash in Sweden has met its Waterloo. The amount of notes and coins in circulation measured as a share of GDP is about one-tenth of that in the euro-zone (See Chart 1), while the proportion of Swedes who paid for their most recent purchase in cash plunged from 39% in 2010 to just 13% in 2018.
  • The rapid decline in cash use is the flipside of the increased popularity of electronic payment methods including Swish – an app-based payment system. As shown in Chart 2, the average Swede now transfers twice as much money by Swish each year as they withdraw in cash.
  • The government is trying to slow the decline in cash use to avoid some in society from being left behind and has proposed forcing banks to continue to provide “reasonable access” to physical cash. Nonetheless, Swedes’ rising preference for electronic payments has forced the Riksbank to seriously consider what role it should play in a largely post-cash future. This has made it a leading figure in the world of so-called central bank digital currencies (CBDC) – a new variant of money, distinct from physical cash or central bank reserves. This Update answers ten key questions on its e-krona project.
  • 1. What is the Riksbank trying to achieve with the e-krona? The Riksbank is preparing for a situation in which physical cash disappears altogether and where all transactions in Sweden must be made by card and other electronic methods. This would be undesirable from the Bank’s point of view because it would mean that the payment system would be concentrated in a small number of private firms, which would leave it vulnerable to oligopolistic behaviour and possible technical disruption. Moreover, while bank deposits are not 100% safe (banks sometimes go bust, albeit rarely these days), a digital version of cash would mean that households and firms would still be able to acquire a risk-free claim directly on the state if they wish.
  • 2. Is the Riksbank the only central bank looking into CBDCs? Certainly not. A BIS report from earlier this year showed that 70% of the 63 central banks that responded to its survey in late-2018 were working on CBDCs in some form. While most are at very early stages, China is reportedly ready to unveil its own one!
  • Central banks are approaching CBDCs from a variety of angles. Uruguay, like Sweden, has acted because cash usage there has also fallen, and it successfully trialled an ‘e-peso’ in 2017/18. In contrast, some, particularly in emerging economies, see CBDCs as a way to reduce the use of physical cash, which could help to reduce corruption and shrink the shadow economy.
  • 3. Are all central banks working on similar proposals? No. There are two main types of CBDCs: the first is wholesale CBDCs, which would be limited to financial institutions. (Note that banks’ reserves at the central bank are already a type of digital currency but wholesale CBDCs would widen the availability to non-banks.) The second type is so-called general-purpose CBDCs, which would be available to everyone. Sweden’s e-krona and Uruguay’s e-peso are examples of the latter, while China will adopt a ‘two-tier’ structure in which the PBOC issues CBDC to financial institutions, which in turn circulate this to the public.
  • 4. How is this related to blockchain? Distributed ledger technology (DLT), of which blockchain is one form, is being used to clear and settle transactions for some wholesale CBDCs, including a pilot between Canada and Singapore aimed at simplifying the processing of cross-border payments. That said, the Riksbank does not think that DLT could keep up with the required level of transactions for a general-purpose e-krona, at least at present, and it was perhaps illustrative that Uruguay did not use DLT it in its e-peso trial.
  • 5. How would the e-krona work in practice? Nothing has been decided yet but there are two options for designing a general-practice CDBC: the first would involve individuals having accounts at the Riksbank which they could use to transact, like they currently do with private banks, for example. The second option – the so-called value-based approach – would involve e-krona being stored locally in an app or a mobile phone, say. In either case, unlike the anonymity afforded by physical cash, the ownership and usage of e-krona would necessarily have to be traceable, partly to prevent “double spending”.
  • 6. Will everyone end up switching to e-krona? Probably not. Even if e-krona were available as a risk-free digital alternative to privately-backed money, we suspect that most Swedes would be in no rush to pull money from their bank accounts, particularly given that the first SEK 950,000 (EUR 89,000) of bank deposits are protected by the state. That said, take-up of e-krona could surge if there was a banking crisis.
  • 7. I’ve heard that the e-krona could constrain monetary policy and endanger financial stability. Is that right? Everything depends on how it is designed, including whether it would bear interest or not, and whether the Riksbank would impose any ownership restrictions on it. (The latter is partly a legal question.)
  • At one extreme, if the e-krona does not bear interest and public access to it is unrestricted, it would impose a floor on nominal interest rates and government bond yields at zero. This is because it would be more convenient and less costly for households and firms to shift into the safety of digital cash than it is with physical cash. This also means that the banking system would also probably be more prone to bank runs ‘to e-krona’ than it currently is with physical cash, which could be a recipe for instability in crises.
  • 8. That doesn’t sound good. How about if the e-krona does bear interest? In this case, it would essentially provide a separate monetary policy instrument. If physical cash still circulates alongside it, the effective lower bound for nominal interest rates would continue to reflect the cost and inconvenience of storing banknotes. (Nobody knows where this rate is but it is estimated to be in the region of -2%.) But if physical cash were phased out, it would be possible to charge people to hold digital cash. This would open up the possibility of cutting nominal interest rates even further into negative territory in future downturns.
  • 9. What set-up would the Riksbank prefer? The initial focus for the Bank’s pilot scheme is on a value-based e-krona that does not bear interest, similar to that trialled in Uruguay. However, given the undesirable features of a zero-yielding e-krona, we suspect that the final design, if and when it is decided, would be more complex and would be interest bearing and/or give the Bank the ability to impose restrictions on ownership. Indeed, the Bank has argued that it would need “tools, as and when necessary, to influence the demand for e-krona”, which a zero-yielding and widely available e-krona would not be able to deliver.
  • We think that the Bank’s desire to be able to influence demand for e-krona is aimed more at limiting the potentially destabilising properties of the medium rather than to give it more room for manoeuvre on the policy front. Nonetheless, while the Bank has clearly been uncomfortable with even mildly negative interest rates in recent years, it may be more willing to use them to a greater extent in a cash-less future.
  • 10. What are the next steps? The Riksbank considers that it already has the mandate to issue a value-based e-krona but would need its Bank Act to be “clarified” before it could issue an account-based version. The fact that it submitted a proposal to the Riksdag earlier this year to review the state’s role on the digital payment market shows that it is serious about the project. Our best guess is that the Riksbank will be first central bank to offer a general-purpose CBDC directly to the public, probably within the next five years.

Chart 1: Cash in Circulation (% of GDP)

Chart 2: Cash Withdrawals & Mobile Payments (Thousand SEK Per Person, Per Year)

Source: BIS

Source: Riksbank


David Oxley, Senior Europe Economist, +44 20 7811 3906, david.oxley@capitaleconomics.com