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Globally, the percentage of financial transactions that are based on cash payments is declining rapidly. This change has been brought on by a number of factors, including technological developments that have given rise to new digital payment services, as well as ways of implementing a digital currency. Other drivers for change include the expansion of e-commerce and more demanding end-users.
Digital signatures make it possible to essentially certify that a value was created by a given organisation – a central bank, in the case of a digital currency. Blockchain technology makes it possible to decentralise the ledger, so network participants can perform transactions without the direct involvement of a central service.
Sweden’s central bank, Riksbank, set out to explore the use of digital currencies in Sweden and set up a new division for that purpose in 2019. Its “e-krona division” is tasked with investigating technical solutions for a digital complement to cash, along with the associated regulatory issues.
In February 2020, Riksbank contracted Accenture to supply a technical solution to be piloted in a closed test environment. The system was tested by Riksbank using simulated participants (banks), end-users and payment instruments. In April 2021, phase one ended and the Riksbank approved an extension of the pilot into phase two. Phase two just finished in February 2022—and a full report will be published in the spring.
Although Riksbank is nowhere near making final decisions on the underlying technology, it did choose to base the pilot on blockchain technology, representing the currency with tokens in a distributed network. As is the case with banknotes, only Riksbank can create or destroy e-kronor. Each token is a uniquely identifiable digital unit with a certificate that shows it was issued by Riksbank – and each token has a specific monetary value, which can vary from one token to another.
The total amount of money in circulation will remain the same, and the Swedish krona will always have the same value, whether in digital form or in physical cash. Users can store e-kronor locally, but will need a digital wallet to access them. Payments require communication with the e-krona network, which includes banks and payment service providers.
One important characteristic of the scheme is that each token can be used only once. As soon a token is used, it is registered as consumed, and the amount of money represented by the token gains a new representation in the form of one or more new tokens.
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Riksbank distributes e-kronor to other banks participating in the network which, in turn, distribute the currency to the general public. Each network participant has its own network node, which it uses to request e-kronor from Riksbank. Riksbank then creates the appropriate amount of digital currency, distributes it to the participant’s node, and debits the amount in a settlement account associated with the participant.
Participants can then further distribute e-kronor to end-users’ digital wallets through a payment instrument, such as a mobile app or a card. End-users can then use the e-kronor for transactions, and can exchange them back for holdings with a participating bank.
The e-krona network is based on blockchain, which creates a distributed ledger. The distributed nature of the network means that other nodes can continue to function even when there is a central failure. The only time centralised control is required is when e-kronor are created or controlled. In both cases, Riksbank must be involved and must debit or credit its settlement system.
Participant nodes ensure the authenticity of e-kronor by verifying the transaction history and making sure it can be traced to Riksbank as the issuer. A specific control function is invoked to verify that a specific token is unconsumed.
Existing digital representations of money – such as in bank accounts – cannot be stored locally and require connection to a central service for access. This is not the case with e-kronor, which can be stored locally in digital wallets. As long as the end-user has a payment instrument, he or she can spend the money without the direct involvement of a bank.
Future of the e-krona
The first phase of the pilot was tested using simulations, with special attention paid to liquidity supply via the Riksbank settlement system and the role of the participants that distribute e-kronor to end-users. The second phase of the pilot was based on the same technological choices, but with new areas of focus – including integration with existing point-of-sale terminals and with the internal systems of commercial banks. Other areas of focus during phase two were offline functionality and improved performance and scalability.
As well as testing the technological basis of the e-krona, the pilot project has been exploring legal and ethical issues – the same issues that are likely to arise in any other country bold enough to make an early transition to central bank digital currencies (CBDCs). The big question now is: will Sweden be one of those early adopters?
On 25 January 2022, during the opening session of the DC³ conference entitled “From cryptocurrencies to CBDCs”, Riksbank’s first deputy governor, Cecilia Skringsley, spoke about the future of the e-krona. “The question of an e-krona is currently the subject of a formal inquiry by the Swedish parliament,” she said.
Riksbank continues to work on the legal issues and will provide support to the formal inquiry by the Swedish parliament during the year. “Most likely, legislation needs to be adopted in order to meet future needs,” said Skringsley, emphasising rules on anti-money laundering and know your customer – and on imposing caps on payments.
In the meantime, Skringsley said she remains hopeful that one of the potential benefits to Swedes is that the private sector will be able to develop new payment services using the Riksbank platform. “The private sector will always be a lot better at innovating end-user services,” she added.