Nordic central banks drive fintech and digital currency

Banks are working together through a cross-border financial technology development hub

Nordic developments within the digital currency domain have produced a landmark cross-border technology hub collaboration between Scandinavia’s four central banks and the Bank for International Settlements (BIS).

This deepening relationship is expected to deliver joint ventures in the same sphere, as Nordic central banks look to partner with private technology firms to build the greater expertise they need obtain next-generation financial technology (fintech) solutions.

The collaboration between Denmark’s Danmarks Nationalbank, Iceland’s Seðlabanki Íslands, Norway’s Norges Bank and Sweden’s Sveriges Riksbank aims to establish an Innovation Hub Nordic Centre (IHNC) in Stockholm headed up by the BIS. It will focus on creating far-reaching financial market infrastructure solutions, including for digital currencies that have the capacity to revolutionise payment systems and how cash is used.

The IHNC will bolster the ability of Scandinavia’s central banks to grow their innovation cultures and stay at the cutting edge of research into digital solutions and fintech innovations.

The BIS emerged as a natural partner for the four Scandinavian central banks, said Stefan Ingves, governor of Sveriges Riksbank. “The BIS Innovation Hub has become a key driver of central bank fintech experimentation. The partnership between the BIS and Nordic central banks in the IHNC marks an important step to advance this mission to develop solutions that provide financial evolution and stability.”

The hub model has six areas of primary focus: supervisory tech (suptech) and regulatory tech (regtech); next-generation financial market infrastructures; central bank digital currencies; open finance; cyber security; and green finance. In particular, the IHNC will prioritise in-depth analysis of technological financial innovations that are relevant to central banks.

The Stockholm-headquartered IHNC is the latest such centre to be opened by the BIS since the innovation hub concept was established in 2019.

The BIS has already opened Innovation Hub Centres (IHCs) in collaboration with the Bank of Canada, the Bank of England and the European Central Bank/Eurosystem, which operates in Frankfurt and Paris. It has also launched innovation hubs in Hong Kong, Switzerland and Singapore, and has formed a partnership with the Federal Reserve System in New York.

For the Scandinavian central banks, the IHNC offers a value-added central focal point for a network of experts in fintech innovation. Its research function will explore critical trends in financial technology that impact central banks and their future evolution in the fintech space. The BIS connection will also promote international collaboration in this space that will help strengthen the overall functioning of the global financial system.

Among the Nordic central banks, Sweden’s Riksbank has invested most resources to date to develop a digital e-currency, the e-krona. The digital currency project is supported by external partnerships formed by the central bank with pan-Nordic bank Svenska Handelsbanken and Helsinki-based fintech TietoEVRY. 

Handelsbanken is part of the Riksbank-led project to assess the advantages and challenges of introducing a digital e-krona. The project gives Handelsbanken the opportunity to participate in what may prove to be one of the first publicly available digital currencies controlled by a central bank anywhere in the world, said Benny Johansson, head of the bank’s Nordic payments division.

“The Riksbank and the Nordic payments market are leaders in their fields,” he said. “Handelsbanken’s role in the partnership will enable the bank to evaluate what benefits the digital currency may provide, as well as giving us the chance to create value for Handelsbanken, our customers and society overall.”

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These Nordic advances with digital currencies take place against a backdrop of cash usage across Scandinavia falling to about 10%, and where digital mobile payment alternatives, provided by Nordic fintech actors such as Swish, MobilePay and Vipps, are increasingly popular with consumers.

The Riksbank is currently developing and testing a system for a digital e-krona that is based on blockchain technology. One of the core objectives of the e-krona pilot project is to test various technical solutions that can elevate the Riksbank’s knowledge about how an e-krona can function and be used as a complement to cash when offered as a state-guaranteed cash alternative.

The primary solution being tested by the Riksbank is based on distributed ledger technology and blockchain technology in which the e-krona assumes the form of “tokens”, or digital units, that contain information on value and origins.

But despite its progress, the Swedish central bank has yet to reach a definitive decision on whether to issue an e-krona in the future. Research continues to assess how an e-krona might be designed, and what technology could be used if the bank decides to introduce a digital currency alongside cash in Sweden.

TietoEVRY joined the Riksbank’s phase-two digital currency e-krona pilot project in May 2021. In the project, TietoEVRY is tasked with creating simulation models to demonstrate how banks might interact with the e-krona infrastructure.

Central bank digital currencies (CBDCs) have the potential to provide central banks with the fintech tools to meet future payment needs, foster innovation and enhance cross-border payments, said Karin Schreil, managing partner at TietoEVRY Sweden. “Our role will be to develop and test the process of interchangeability between commercial money and the e-krona, and analyse how this can be carried out securely and efficiently,” he said. “The Riksbank’s digital currency pilot reinforces Sweden’s innovative culture and position on the global fintech stage.”

TietoEVRY’s invitation to join the e-krona pilot project stems from the company’s position as a major player in the Nordic payments domain. Over 70% of all Nordic bank transfers go through TietoEVRY’s payment systems, while the company’s technology facilitates the region’s leading mobile payment providers in Sweden, Norway and Finland.

Although the properties of cash will be preserved, the future is for cash to become digital, said Joachim Samuelsson, CEO of fintech Crunchfish.

“In a digital world, it will be possible to pay offline just with physical cash, but the real dividend is that any payment service can be connected digitally in the world,” he said. “This can’t be done today because all payment services are online. It is extremely complex to connect a merchant in Japan with someone using a Swedish app. The answer is to have an offline and an online solution.”

Crunchfish is partnered with eCurrency Mint to develop an offline CBDC solution that uses the offline wallet and private payments capability.

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