Sveriges Riksbank Economic Review Second special issue on the e-krona 2020:2 SVERIGES RIKSBANK SVERIGES RIKSBANK ECONOMIC REVIEW is issued by Sveriges Riksbank. Editors: MARIANNE NESSÉN AND ULF SÖDERSTRÖM Advisory editorial committee: MIKAEL APEL, HANNA ARMELIUS, DAVID KJELLBERG, DILAN OLCER, AND THE COMMUNICATIONS DIVISION Sveriges Riksbank, SE-103 37 Stockholm, Sweden Telephone +46 8 787 00 00 The opinions expressed in signed articles are the sole responsibility of the authors and should not be interpreted as reflecting the views of Sveriges Riksbank. The Review is published on the Riksbank’s website www.riksbank.se/Economic-Review Order a link to download new issues of Sveriges Riksbank Economic Review by sending an e-mail to: [email protected] ISSN 2001-029X SVERIGES RIKSBANK ECONOMIC REVIEW 2020:2 3 Dear readers, The second issue of Sveriges Riksbank Economic Review in 2020 has a special theme, namely central bank digital currencies (CBDC) and the e-krona. Regular readers of the Economic Review may remember that there was a theme issue on the e-krona in 2018 which summarized some of the work that had been done then. The Riksbank has since continued to delve into various aspects of CBDC, both from an analytical and a practical perspective. Some of this work is summarized in this issue. In more detail the articles are as follows: • The rationale for issuing e-krona in the digital era Hanna Armelius, Gabriela Guibourg, Andrew T. Levin and Gabriel Söderberg describe the rationale for providing e-krona to the public through a partnership between the Riksbank and supervised private payments service providers. They discuss the challenges facing the Swedish monetary system and consider potential ways forward to ensure that the monetary system remains efficient in the future. • Is central bank currency fundamental to the monetary system? Hanna Armelius, Carl Andreas Clausen and Scott Hendry discuss whether central bank money that is available to all is fundamentally important for the national monetary system, focusing on the need for convertibility between commercial bank money and publicly available central bank money. This issue is particularly important for countries like Sweden, where cash is becoming marginalized. • Competitive aspects of an e-krona Mats Bergman evaluates whether the introduction of an e-krona can be justified on grounds related to market power and insufficient competition in the payment markets, today or in a future scenario where cash is absent. He considers in particular the rapid decline of cash use in Sweden; the strong network externalities that characterise the payment market and its associated tendency towards natural monopoly; and the risks for monopoly profits and inefficiencies if the payment market becomes entirely private. • The Riksbank’s seigniorage and the e-krona Peter Gustafsson and Björn Lagerwall discuss how the introduction of an e-krona could affect the Riksbank’s ability to generate profits. They also address the question of how high the demand for an e-krona would have to be to cover the Riksbank’s current expenses. • Central bank digital currencies, supply of bank loans and liquidity provision by central banks Reimo Juks uses a theoretical model to analyze whether the issuance of a central bank digital currency (CBDC) can have adverse effects on the supply of bank loans and thereby macroeconomic activity. Among other things, he discusses banks’ measures to deal with increased outflows, and how central banks can offset the potentially adverse effects of CBDC on the supply of bank loans. • E-krona design models: pros, cons and trade-offs Hanna Armelius, Gabriela Guibourg, Stig Johansson and Johan Schmalholz discuss how the e-krona and the related payments infrastructure could be designed in order to fulfil 4 SVERIGES RIKSBANK ECONOMIC REVIEW 2020:2 the Riksbank’s mandate of promoting a safe and efficient payment system, as Sweden moves towards a cashless society. Using four different design models, they discuss possible trade-offs involved in the design of an e-krona, for instance weighing the advantages of more minimalistic approaches against performance as regards enhanced competition and resilience, and the amount of decentralization versus control over data and privacy. Read and enjoy! Marianne Nessén and Ulf Söderström SVERIGES RIKSBANK ECONOMIC REVIEW 2020:2 5 Contents The rationale for issuing e-krona in the digital era 6 Hanna Armelius, Gabriela Guibourg, Andrew T. Levin and Gabriel Söderberg Is central bank currency fundamental to the monetary system? 19 Hanna Armelius, Carl Andreas Clausen and Scott Hendry Competitive aspects of an e-krona 33 Mats Bergman The Riksbank’s seigniorage and the e-krona 55 Peter Gustafsson and Björn Lagerwall Central bank digital currencies, supply of bank loans and liquidity provision by central banks 62 Reimo Juks E-krona design models: pros, cons and trade-offs 80 Hanna Armelius, Gabriela Guibourg, Stig Johansson and Johan Schmalholz 6 THE RATIONALE FOR ISSUING E-KRONA IN THE DIGITAL ERA The rationale for issuing e-krona in the digital era Hanna Armelius, Gabriela Guibourg, Andrew T. Levin and Gabriel Söderberg* Armelius, Guibourg and Söderberg work in the Payments Department at the Riksbank. Levin is Professor of Economics at Dartmouth College. This article describes the rationale for providing e-krona to the public through a partnership between the Riksbank and supervised private payments service providers. This arrangement can foster competition and innovation while ensuring the fundamental security and efficiency of the monetary system. These considerations are increasingly relevant as the use of paper cash falls because commercial institutions may not have sufficient profit incentives to provide an alternative means of payment that is universally accessible. Moreover, in a digitalized economy, Big Tech firms and other multinational enterprises are increasingly likely to issue their own private currencies to facilitate their collection of valuable information about consumer behavior. Therefore, launching an e-krona would help ensure that all Swedish individuals have access to an efficient, convenient, and secure means of payment. 1 Introduction Digitalization is rapidly changing the payment market in many countries around the globe, as new technology interacts with demographic shifts and changing consumer behavior. These changes are particularly relevant to Sweden. The usage of cash has fallen rapidly, leading to a situation in which many retailers no longer accept cash and some Swedish households who have difficulties using digital payments are worried about how they will be able to pay for ordinary purchases if cash disappears altogether.1 In the past, cash has also functioned as a back-up alternative if the private electronic systems fail. The systems needed for service payment providers to offer payment services to end users are concentrated among a few key players. This is not unique for Sweden but is a general characteristic of payment markets around the world. What is special about the Swedish situation is that market concentration, in combination with the marginalization of cash, raises concerns not only about robustness and resilience but also about competition on the payment market. This latter question arises because cash no longer poses a competitive threat to the payment services offered by incumbents. Lastly, the marginalization of cash as a means of payment leaves Swedish citizens without access to money issued by the central bank, the safest form of money. This paper suggests that a well-functioning and trustworthy means of payment should be viewed as a public good that warrants the ongoing direct involvement of the public sector. Firstly, the government has an intrinsic responsibility to maintain a stable store of value and unit of account that facilitates the decisions and plans of households and businesses. This * We would like to thank Carl Andreas Claussen, Stig Johansson, Johan Molin, Björn Segendorf and Anders Vredin for their valuable comments. The views in this paper are the authors’ views and should not be interpreted as the views of the Riksbank or its Executive Board. 1 The Riksbank has pointed to several possible negative consequences of an economy with no public access to central bank issued money. See Sveriges Riksbank (2017), (2018). SVERIGES RIKSBANK ECONOMIC REVIEW 2020:2 7 consideration provides the fundamental rationale for ensuring that the public has continuing access to money issued or fully backed by the government. Secondly, the government must ensure that the payment system is safe, efficient, and inclusive; that task is broadly similar to its responsibility for ensuring the effective provision of other basic utilities, such as clean water and reliable electric power. This will contribute towards protecting the role of the Swedish krona as a means of payment, store of value and unit of account in Sweden in the face of competition from private digital currency initiatives from Big Tech firms. Thirdly, as companies with a business strategy of commercializing user data emerge, individuals should have the possibility of paying using a public alternative that ensures that the data generated by their purchases is not stored and commercialized. It is the role of the government to protect personal integrity in a democratic society. In this paper, we highlight the challenges facing the Swedish monetary system and we consider potential ways forward to ensure its efficiency in the future. Sweden is a small,