Sweden's Riksbank is debating whether to become the first significant central bank to issue a digital currency as it responds to an increasing move away from cash in the Scandinavian country.
The world’s oldest central bank - it was the first to issue paper banknotes in the 1660s - is launching a project to examine what a central bank-backed digital currency would look like and what challenges it would pose. It hopes to take a decision on whether to start issuing what it calls an ekrona in the next two years.
"This is as revolutionary as the paper note 300 years ago. What does it mean for monetary policy and financial stability? How do we design this: a rechargeable card, an app or another way?" Cecilia Skingsley, deputy governor at the Riksbank, told the Financial Times.
Central banks around the world have only begun grappling with the potential benefits and challenges arising from digital currencies such as bitcoin in recent speeches from the likes of the Bank of England and the Bank of Canada.
But a dramatic drop in Sweden in the use of cash - the amount of notes and coins in circulation has fallen by 40 per cent since 2009 - has forced the Riksbank's hand.
“We really have no one to look at when it comes to how to design it and what are the possible consequence?…?It’s not an option for us not do anything,” said Ms Skingsley.
The Riksbank, like other central banks, already provides electronic money through accounts to banks and clearing organisations. But it only provides central bank money to individuals through notes and coins.
“We need to do the homework because it’s not an option for the public sector to stay on the sidelines and see the private sector cut off access to central bank money for individuals,” said Ms Skingsley, who will give a speech on the issue on Wednesday.
However, she stressed that the Riksbank saw a digital currency as complementary to notes and coins, not as a replacement.
There are considerable questions for Sweden’s central bank to answer about how a digital currency would work. Would individuals have an account at the Riksbank? Would transactions be traceable, unlike with cash? Would emoney earn interest?
Ms Skingsley said: “Personally I would like to design it in a way that is most like notes and coins.” That would mean no interest would be paid on it. But she added that the state had no interest in helping illegal activity, suggesting some form of traceability.
The Riksbank would also need to consider financial stability issues such as whether they would or should compete with commercial banks’ deposit base. Ms Skingsley said she was concerned that in times of financial instability citizens could transfer money to a state-backed electronic system, potentially increasing instability.
The type of technology to be used in the digital currency is up for grabs, according to Ms Skingsley. Much attention has been placed on blockchain, a complex set of algorithms that allows digital currencies to be traded and verified over a network of computers without a central ledger. Four of the world’s biggest banks recently clubbed together to develop their own form of digital cash.
Ms Skingsley said: “I’m indifferent if people want to use our product or another way of paying if they think it fulfils the basic demands we have for money.”
