Since the emerge of crypto currencies like Bitcoin and the corresponding blockchain technology, the assumption that the abolishment of cash is imminent, resounds throughout the land. Especially Scandinavian countries with advanced digitalization pushing de-cashing on, in first place Sweden, which plans to implement a digital currency, called the e-krona.
The Riksbank evaluates in fact the implementation of a Central Bank digital currency and plans to test the e-krona in a limited pilot project in 2019. But, there is a need to clarify this development before prognosticating the abolishment of cash.
Characteristics of Sweden promoting e-payments
It is necessary to know, that Sweden is a country with special characteristics, incomparable to other countries. Sweden is a very transparent state and Swedish people have traditionally strong trust in the state, quite the contrary to other countries - also EU countries - not least by the financial crisis. Sweden is a land with low population density. And the low number of bank branches and ATMs are a result of a cost cutting policy of the Central Bank and retail banks in Sweden. Therefore, the cost of cash increased in relation to cost of electronic payment systems, and the distance to the next cash point can be up to 100 km in Sweden.
The trust in digitalization is in Sweden as high as the trust in the state. Sweden and other Scandinavian countries pushed the implementation of a digital infrastructure intensively. Almost all business areas in Sweden are running electronically, and the Swedes adopted such user experience to a more and more cashless payment behavior. Today, the ratio for cash payment transactions reached a bottom line of 20 to 25 percent and cash in circulation was divided in half within the last 10 years.
Considerations of the Riksbank
The extension of e-payments increases the importance of bank deposits. Money in bank accounts and saving deposits are bookkeeping values. Bank deposits have not the status of legal tender and simply represent credits against financial institutions.
The increasing dominance of e-payments and its associated decline of cash payments results in a disadvantage for the society. Privat persons and corporations do not have any longer direct access to Central Bank-issued high powered money (M0), allocated to cash and Central Bank reserves of financial institutes.
Without access to banknotes and coins, individuals and companies could be completely cut of from legal tender. In a cashless society, only banks have access to „high powered money“. This scenario could become critical in a financial crises, when financial institutes collapse and individual deposits are irrecoverable lost. In spite of deposit guarantee systems, governments have to answer the question how long a financial system can withstand such a situation.
The responsibility of Central Banks is to maintain the trust of the citizens in the monetary system. The Riksbank answers this question by implementing a Central Bank digital currency, the e-krona. The issued e-krona will be legal tender and provide citizens direct access to high powered money of the Central Bank. A Central Bank platform allows the general public of Sweden to carry out their payments with the e-krona electronically and in real-time.
The e-krona joins with Bitcoin simply the security architecture of a blockchain technology. The e-krona system will be not organized in distributed ledgers. The control of e-krona remains in the responsibility of the Riksbank.
Lower limit for cash in circulation
The solution of a problem often creates a new problem. If every citizen is able to obtain an account at the Central Bank, e-payments of general public no longer depending on services of retail banks. Government agencies have to consider the consequences for the current banking industry.
This leads to a risk assessment regarding business contingency. Major questions are not answered yet, e.g. what will happen with a cashless society in case of a digital black-out? Even today, the Swedish cash in circulation is limited to an operating cash holding range of five days before run-out. Swedish authorities see the risks of cyber attacks on their digital infrastructure as well. Cyber attacks could paralyze e-payment platforms and comprise losses of individual deposits at bank accounts.
- The trust in e-payments requires an implied commitment for an option to go with cash as common payment instrument. In analogue, the faith in many international currencies is confirmed by gold reserves, albeit since 1976 the IMF repealed the gold standard.
Therefore, the Riksbank declared that the e-krona will be no replacement for banknotes and coins, but rather a supplement. The implementation of the e-krona is furthermore a result caused by the widespread use of e-payments in Sweden.
- Constitutional states should go for basic cash services. This means investments in an efficient cash infrastructure in face of a reduced cash in circulation. The consequence is a sufficient cash point network through bank branches, ATMs or retailer locations with cash acceptance. In addition, a digitalization of cash logistics along the supply chain is necessary to optimize cost of cash.
The Swedish parliament prepares a legislative proposal by autumn 2018 aiming to provide basic cash services for Sweden. One objective is that a bank branch or an ATM should be reachable within 25 km. Such a development will stop the ongoing trend to abolish cash in Sweden.
- The lower limit for payments with cash is hit by a transaction ratio of 20 to 25 percent. A further abolishment of cash would confront states with technical and even legal trouble. Basic cash services constitute public basic rights. Sweden’s payment model shows that the reduction of cash cannot be implemented in constitutional states without curtailing parts of a society by basic rights.
Sweden is a pattern for eco-systems of digital payments in the world. But the characteristics of Sweden illustrate as well, why there is no other country as far as Sweden by developing a crypto currency. Mandatory, other countries going the Swedish way will face the same challenges.
The Swedish model shows that both eco-systems - of digital money and of physical money - have to exist in coexistence. The optimizing of cash infrastructure is much more needed than ever.
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Sources: Bertelsmann-Stiftung 2018; Deutsche Wirtschaftsnachrichten in May and June 2018; Amanda Billner and Rafaela Lindeberg in Bloomberg News, April 2018; Business Insider Deutschland, April 2018; Finanz und Wirtschaft, December 2016, Central Bank reports, IMF 2018