Sweden is moving towards becoming a cashless economy, and it has taken another step forward in this direction. The Swedish central bank has developed a digital currency called the “e-krona”.
Riksbank authorities have clarified that e-krona is not a cryptocurrency like Bitcoin or others that exist in the market. That is a significant step in open competition between centralized digital currencies and decentralized cryptocurrencies.
Although Sweden is part of the European Union (EU) as a member state, it does not accept the euro as its official currency and retains its currency, the Swedish krona. This requirement was rejected in the 2003 referendum that asked Swedes if they wanted to join the eurozone. But in the future, it will have to adopt a single European currency. (1)
In May of last year, the Bahamas became the first government to issue a worldwide central bank digital currency (CBDC) known as the “Sand dollar.” The e-krona, on the other hand, is the first digital currency to enter the market with the support of a significant economy. Around 80% of the world’s central banks are also doing pilot testing. (1)
The Swedish central bank, Riksbanken, has clarified that the e-krona is not a cryptocurrency like Bitcoin and others that exist in the market. Although it employs blockchain technology, its aim is to complement physical banknotes and coins with digital tokens.
Read more about Cashless society – benefits and negative effects it could bring
The Riksbank wants to ensure “that payments can be made safely and efficiently,” They think that their possibility to do so might decrease if cash is no longer used. That’s because all payments will be made through private payment methods. (3)
Riksbank sees the problem mainly because the payment system in Sweden is very consolidated.
In Sweden, the vast majority of bills are paid to a “Bankgiro number.” Bankgirot is a corporation owned by seven Swedish banks, with the four largest banks in Sweden owning 97.7 percent of the Bankgiro stock. (3)
In the past couple of years, Swish has become very popular. Swish allows transferring money instantly between individuals. Money is sent by using an app and by simply entering the phone number of the receiver. Regardless of the banks, sender, and receiver use, the money immediately appears in their bank account. Only phone number must be linked to existing bank account – no need for a new account.
This payment method is increasingly used for commerce and is now the quickest and easiest way to pay for trains, bus or subways in Sweden.
According to European Central Bank, the current daily average number of instant payments ins Sweden is 1.5 million per day.
The largest banks own Swish, and it relies on infrastructure owned and created by above mentioned Bankgirot. (3) While it is an excellent service for customers, it is one of the reasons why cash usage is declining so quickly. It gives banks more power and significant control over the market.
The Riksbank is concerned that if these payments systems fail or collapse, there will be no alternative.
When cash is gone, and all the money is digitalized, there is no longer a way for people to get their money out from the banking system. Potentially people can only buy something for that cash or transfer it to another bank account. If the money can’t leave the bank system, banks have a huge advantage and could potentially make riskier financial decisions. This creates a whole new set of issues for the customers.
In theory, with an e-krona, there is again a way for the public to get their money out of the bank system – this time digitally. This creates a whole new set of problems for the banks because many people might want to withdraw their money and move it to e-krona. This could drastically affect a bank’s health and make a “bank run “possible in Sweden.
Bank run – A bank run occurs when many clients withdraw their money from a bank because they believe it may cease to function soon.
This could restore the balance and move some of the power back from the large, commercial banks to the customers and the central bank. All of this might sound good on paper, but there are definitely some points of concern.
Central Banks’ digital money might sound like a significant step forward in the financial world, but there are some concerns. Critics of CBDC have suggested that this kind of solution might threaten its citizens’ privacy when deployed by authoritarian governments.
For example, China is close on Sweden’s tail in the race to establish the world’s first CBDC, with four of its biggest banks beginning internal CBDC testing in April. However, while many Chinese customers now pay for items using applications linked to their bank accounts, such as WeChat or Alipay, a state-run payments system would allow the government to track all of its people’s transactions. (2)
Ola Nilsson, a specialist in consumer policy at the Swedish National Pensioners’ Organisation, explained to the European CEO that Sweden’s cashless society has some disadvantages, especially to those living in rural areas, the disabled, and older people. He explained further that many older people in Sweden have used digital payments for years, but a large group of people is “not there yet ” with paying everything digitally. This means they will have problems doing things in everyday life that they have managed to do before – paying for bus tickets, car parking, shopping, and more.
Swedens Central Bank is 100% state-owned, and according to Wikipedia, it’s the world’s oldest central bank and fourth oldest bank in operation. Although Riksbank is state-owned, it still must answer to European Central Bank and follow its guidelines.
In most democratic countries, capital competitiveness is the key to progress. Companies try to navigate the market, providing more efficient, cheaper, and more innovative customer solutions.
With CBDC and e-krona there is a genuine risk for banks to attract funds, and in doing so undermine their ability to make loans. As a result, central banks may face increased pressure to join the loan market to compensate directly. A central bank that is the cheapest supplier of retail payments and loans would seem like a monopoly state bank, which is hardly a step forward.
With the e-krona and CBDC transition, technical errors may occur. Currently, the Swedish Civil Contingencies Agency advises everyone to keep cash at home in small denominations if the payment system crashes. Some experts argue that Sweden should avoid a complete transition to the e-krona for this exact reason – the Riksbank has previously said the e-krona would complement, rather than replace, cash. (2)
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Read more about e-krona and its updates from Riksbank published documents: