SPEECH
SVERIGES RIKSBANK
DATE:
08/12/2017
SE-103 37 Stockholm
SPEAKER: (Brunkebergstorg 11)
Governor of the Riksbank Stefan Ingves
VENUE:
Swedish House of Finance, Stockholm
Tel +46 8 787 00 00
Fax +46 8 21 05 31
registratorn@riksbank.se
www.riksbank.se
Do we need an e-krona?
Do we need digital cash - an e-krona as the Riksbank calls it? This is a question
currently being analysed and subjected to lively debate in the central bank world.
It is scarcely surprising that there is so much interest in this question, given that it
covers all of a central bank's areas of activity - the responsibility for a safe and
efficient payment market, monetary policy and the task of maintaining financial
stability. The question also touches on almost philosophical musings as to why the
need for central banks arose once upon a time. What was then needed was a
public institution that created a standard method of payment that the general public
could rely on. Several centuries have passed since then, but the same need
probably remains. This is why the Riksbank wants to investigate whether an e-krona
could be the solution to provide the general public with continued access to central
bank money even when Sweden has stopped using cash.
Banknotes and coins abandoned
Various agents in society are approaching the subject of digital money from
slightly different perspectives. In the central bank world, some have focused on
the opportunities that technological innovations in the financial sector,
particularly block chain technology, can offer the payment infrastructure. Others,
particularly in emerging economies, regard digital central bank money as an
opportunity to supply fundamental payment services to those people who do not yet
have access to them.
In Sweden, we are approaching the issue from what is a unique situation in an
international perspective, namely that demand for banknotes and coins is declining
rapidly. Since 2008, the demand for cash has declined by around 40 per cent. This
is largely due to the demand for the highest banknote denomination, the
1,000krona note, having declined, which can be interpreted to mean that cash has lost
its attraction as a store of value. In recent years, however, the demand for smaller
denominations, which are used in everyday transactions, has also declined.1 But it
is not only the decline in demand for cash that indicates the use of cash is
diminishing. According to the Riksbank's survey of the Swedish people's payment
habits, around 40 per cent of payments in the retail trade were made in cash in 2010.
This figure has now declined to 15 per cent.
Unique reduction in demand for cash
Note. SEK billion (annual average). Cash in circulation as a percentage of GDP. Sources: Statistics
Sweden and the Riksbank.
It is a well-known fact that the payments market is characterised by network
effects. Put simply, the more people who use or accept an instrument of payment,
the greater benefit each consumer or merchant has from using or accepting it.
Few people would want to have a card if there were not sufficient traders who
accepted card payments. Traders on their part would not want to accept card
payments if there were not enough consumers willing to pay with cards. In other
words, a critical mass of users is needed for a payment instrument to be generally
accepted and successful.
When fewer and fewer people are using a payment instrument, one gradually
reaches a point where it is no longer profitable to continue using the instrument.
Then it will disappear from the market, which was the case with cheques in
Sweden in the 1990s. Given that the use of cash is declining rapidly, there is reason to
wonder whether we are now reaching the same point with regard to cash. Ac-
cording to current research, half of Swedish traders believe they will stop
accepting cash by 2025. In other words, for Sweden the cashless society is no longer just
a hypothetical situation in the distant future.
Digitalisation driving development
The rapid decline in the use of cash in Sweden is part of a broad digitalisation
trend that affects society as a whole. Technological advances have given us, for
instance, new more efficient payment solutions such as real-time payments with
the Swish mobile application, which is used for transactions that used to be
mostly cash-based. Similarly, mobile phones can function as card terminals, which
gives small business owners increased opportunity to accept cards. Swedish banks
also have a tradition of cooperating with one another when innovative payment
solutions are introduced on the market. In this way, they can make better use of
network effects and more quickly attain a critical mass of users. Moreover,
Sweden has a highly-educated population that is willing to adopt innovations in the IT
field. Technological advances that lead to more efficient payments, cooperation
between producers of services who make it possible to fully utilise the network
effects, changed consumption patterns and a technology-friendly population are a
powerful combination when it comes to creating changes in payment habits!
In an international perspective, Sweden and the other Nordic countries are way
ahead in this change process. However, the trend is global - an increasing number
of people want to use digital solutions to pay and fewer want to use paper-based
payments, including banknotes and coins. In particular, the younger generations
are quick to adopt digital technology. It is probably therefore only a question of
time before more countries find themselves in the same situation as we have in
Sweden today.
Is it a problem if cash disappears?
This is of course a valid question. There are some groups in society who for
various reasons find it difficult to accept, use or gain access to digital technology and
different solutions need to be found for these groups. But for the majority of the
population, the market appears able to supply payment solutions on its own. The
question does require some careful thought, however. What is money, and what
is required for money to function as such? What is the difference between various
types of money? Why have central banks gained such a central role in the
monetary system? These are practical but nevertheless almost philosophical questions
that cannot be fully dealt with in a short speech. But allow me to nevertheless
develop these questions a little further.
Can "new money" function as an arithmetical unit, store of value
and means of payment?
It is difficult to define what money actually is. Put simply, one can say that it is an
agreement or convention between individuals in a country or region that
"something" will function as money. That "something" can be stones, shells, gold, pieces
of paper or something else. What has been used as money has varied over time
and between countries and cultures. But for money to function as such, it must be
able to guarantee three basic functions. Firstly, it shall function as (1) an
arithmetical unit, that is, all prices shall be expressed in terms of this unit. This
presupposes that there are not many different types of money in circulation that can
give rise to different ways of expressing prices. There must quite simply be a
standardised measure in the same way as the meter system for measuring
distances. Secondly, money must be able to function as (2) a store of value, with a
relatively stable value over time. This is needed because saving is a means of
postponing consumption until a later date. Thirdly, it shall function as (3) a means of
payment, that is, it shall transfer a value to the recipient, who can then use it to
pay someone else. This requires that we have easy access to money when we
need it and that the instruments we use as money can be comfortably
transported with us. It is here that technological advances entail changes.
The money we use must have the general public's confidence
There is a further element that is essential for money and the entire monetary
system to function: the general public's confidence. All those who have entered
into agreements entailing money should rely on them holding. The money must
retain its value over time and be accepted by everyone.
Having said this, it is easy to understand why central banks were created once
upon a time and were given the central role in the monetary system that they
have now. The task of the central banks was to provide the general public with
money in the form of banknotes and coins that did not entail any credit risk and
that inspired confidence - what was known as central bank money. This task
included price stability, that is, that the central banks guaranteed the long-term
value of the money. To begin with, the central banks had this task parallel to
commercial banks, which issued their own banknotes. Then money from different
issuers could have different values, depending on how much money had been
issued, and exchange rates could arise between different types of money.
Eventually, the central banks were also given the responsibility for creating a uniform
standard. In Sweden, this took place in 1904, when the Riksbank was given a
monopoly on issuing banknotes and commercial banks stopped issuing them.
In time, the banks were able to develop payment channels that enabled the
general public to use their account balances as money. In the beginning this involved
cheques and gradually card payments were developed. In Sweden, there were
also state initiatives to make payments more effective. In the 1920s, the Postgirot
system was created, which enable efficient transfers of money to and from
accounts in the system. Just over 20 years later, the banks emulated this and
created their own joint system, Bankgirot. All of these systems are examples of
account-based means of payment. They meet all of the functions that money shall
have: they make use of the same arithmetical unit, their value is guaranteed by
the Riksbank's monetary policy mandate and, as technological advances
continues, these account-based systems offer increasingly efficient mediation of
payments. Account-based means of payment have since come to replace payments
with banknotes and coins to an increasing extent right up to the current situation.
Nowadays, some account-based payments can also be made in real time, a
property that only cash payments could boast once upon a time, when the payment
was made after banknotes changed owners.
Without cash, the general public loses access to central bank
money
If cash were to disappear completely, the general public would only have access
to account-based private bank money. The banks, on the other hand, continue to
have access to central bank money as they have accounts in the Riksbank. So is
this a problem? We return here to the central element of the monetary system
mentioned earlier - confidence in the system. During normal times this is not a
problem. The banks can normally offer a sufficiently high interest rate to attract
investors. But in times of financial stress, which unfortunately occur with some
regularity, both banks and the general public want access to the central bank's
money, which is free from credit risk. The deposit guarantee alleviates the
problem of a lack of confidence but does not entirely resolve it.
It is scarcely surprising that a central bank in the Riksbank's situation needs to at
least investigate whether the arguments that have historically been so important
- that the central bank shall provide the general public with assets and means of
payment free of credit risk - no longer have such great significance. Is it the case
that the general public no longer wants central bank money? Or is it rather the
case that it is only money made of pieces of paper (or cotton) that they no longer
wish to hold in an increasingly digitalised world? If it is the latter, then it is the
Riksbank's duty to investigate the scope for issuing a digital alternative - an
ekrona that the general public can hold. The questions that led to the Riksbank's
monopoly on issuing banknotes in 1904 arise again.
But there are also other reasons for investigating a
digital alternative
Payment in cash presuppose a chain of action that involves issuing, transporting,
storage and distribution of banknotes and coins. It requires a relatively expensive
physical infrastructure to make it work. However, the actual transactions in cash
do not require any further infrastructure. Once the banknotes have changed
owner, the payment is complete.
Payments that are based on individuals having accounts in the bank, what are
now electronic payments, on the other hand require a centralised infrastructure
and processes to identify counterparts, to verify account numbers and to check
whether there are sufficient funds in the accounts. This infrastructure is often
housed with the supplier of the payment service or with some other intermediary.
After these checks, the actual payment is implemented, that is, the money is
moved from the payer to the recipient. This is called clearing and settlement and
it requires a further infrastructure. The systems that manage the entire process
are characterised by both network effects and economies of scale. Both aspects
mean that the payment infrastructure must of necessity be very concentrated and
standardised. Although this is necessary, it entails a number of other problems.
One such problem is greater vulnerability in society as a result of what is usually
called the "single point of failure". If the infrastructure is affected by serious
shocks, there are no alternatives available, especially if cash has been phased out.
Let us assume that the card system stops functioning for some reason, at the
same time as cash payments are no longer possible in practice. This situation
would cause serious disruptions to society.
A further aspect to take into account is that when the infrastructure is
concentrated to the hands of a few, it is easy that problems arise with regard to lack of
competition and entry barriers for new agents. Ultimately, this can in turn entail
efficiency losses for society as a whole and low incentives for innovation.
A potential e-krona could alleviate both of these problems. An e-krona could be
based on a separate infrastructure that could be used if the alternative systems
fail. The infrastructure that an e-krona would require could also be open to
private agents willing to offer payment services linked to the e-krona. The Riksbank
would cooperate with the market, both payment suppliers and fintech companies,
when offering an e-krona to the general public. In this way, an e-krona system
could also provide a platform that promotes competition and innovation.
E-krona is a possibility
Almost three months ago, the Riksbank published a first interim report which
contains much of what I have talked about today. There is also a general description
of how an e-krona might look. It should be available to all, banks, public
authorities, companies and households. It should be possible to use it in real time, 24
hours a day and 365 days a year. It should be possible to use off-line, which means
it could be used even where there is no access to a mobile network, for instance.
Perhaps it could contain some element of anonymity, and perhaps it could be
designed so that even groups who currently find digitalisation difficult to handle can
easily use the e-krona. These are our initial thoughts and the reason why we
published the report before we have thought it all through is that we want to have a
dialogue with the market and other interested parties, as it is such a complex
issue. The dialogues have now been initiated.
We have already identified a number of questions that require further analysis.
These are questions regarding technology, legal issues and the effects of the
ekrona on the economy and financial agents.2 The Executive Board of the Riksbank
will soon take a stance on how to continue the work on these questions next year.
We will continue to be as open as possible and I would like to emphasise that
what we are doing is examining the possibility of introducing an e-krona. No
decisions have yet been taken.
I would like to conclude my speech by reminding you that it was in Stockholm that
the first modern banknote was created more than 350 years ago, and that it is
here, in Sweden, that cash is currently taking its last breaths. Perhaps the
Riksbank will be writing history again.