SPEECH
SVERIGES RIKSBANK
DATE:
22 November 2018
SE-103 37 Stockholm
SPEAKER: (Brunkebergstorg 11)
Cecilia Skingsley
VENUE:
SNS finance panel
Tel +46 8 787 00 00
Fax +46 8 21 05 31
registratorn@riksbank.se
www.riksbank.se
Considerations for a cashless future1
Two years have passed since I asked the question of whether the Riksbank should
issue digital money - the e-krona.2 Since then, we at the Riksbank have started an
investigation and have been given the opportunity to analyse and discuss the
matter from several different angles. Of course, the need to modernise the money
issued by the Riksbank is new and is connected to the increased digitalisation of
society as a whole. But there are also points in common with older issues such as
that of which role central government should play on the payment market.
On 28 September 1900, a crowd of bankers gathered in Stockholm to listen to
Professor Pontus E. Fahlbeck, a member of the Riksdag (the Swedish parliament).
The subject of this meeting was the decision by the Riksdag to give the Riksbank
sole right to issue banknotes in Sweden. As from 1904, the commercial banks'
right to issue banknotes would thus come to an end. At the meeting, this reform
was denounced as unnecessary, inappropriate and even dangerous. It was not
considered possible for the Riksbank, on its own, to be able to provide the 'means
of exchange' to such an extent as to satisfy the needs of the business sector.3
This
was a period of great change, when responsibility for financial services was being
reallocated between the private and public sectors. In retrospect, it was a success
to change the rather undisciplined issuance of banknotes for a standard set by the
Riksbank, leaving the private banks free to concentrate upon deposits and
lending. Now, 118 years later, we are facing a similar situation: once again, we are
discussing how the issuance of money is to be organised and how responsibility can
best be allocated to ensure that our payments are secure and effective.
Now, as then, opinions are divided over the role the Riksbank should play on the
payment market. There are those who are positive to the suggestion of an
ekrona and those who are doubtful towards such an initiative from the Riksbank.
What I would like to communicate today is the insight that, regardless of whether
or not the Riksbank decides to issue an e-krona, the old order will change. We
need a broad discussion of what it means when central government's presence on
the payment market's supply side risks disappearing along with cash. Introducing
an e-krona would entail taking a new step and the consequences of this must be
analysed carefully. But accepting a situation in which the general public no longer
has access to any form of central bank money would also be a step into the
unknown. Issuing digital Riksbank money, an e-krona, as a complement to cash
would be one way of avoiding this situation. The alternative to an e-krona would
be for central government to intervene with more detailed regulation of the
market to ensure society's different interests are met. But this too would have its
problems, as I shall discuss in more detail.
The largest and smallest payments: the Riksbank's role today and in the future
Traditionally, the Riksbank has been responsible for the underlying system in
which all payments in Swedish kronor are settled, the RIX system. This system was
created to manage large-value payments in a highly secure manner. In addition,
the Riksbank's banknotes and coins have been used for the very smallest
payments. The payment market is currently undergoing a large number of major
changes that are affecting both of these 'systems'.
As cash usage declines, almost all consumer payments in shops are now made by
card. This market is completely dominated by Visa and Mastercard and much of
the infrastructure is located outside Sweden's borders. Unlike Norway and
Denmark, Sweden has no card network of its own.
At the same time, new technology is leading to new, convenient ways of paying
becoming available, such as the mobile application Swish, for example. In Sweden,
6.5 million of 10 million inhabitants are connected to Swish. As the rest of society
becomes digitalised, demand is increasing for digital payments and, above all, for
rapid payments that can be made in real time. For the Riksbank, this means
adjusting or complementing the RIX system so that it is able to manage instant
payments in a secure and efficient manner. It is important to ensure that all
participants involved in payments act under equal and equitable rules. At the moment,
we are busy analysing whether we can take advantage of our European
cooperation by joining the European Central Bank's system for instant payments.4 We are
aware, however, that this would mean that part of our infrastructure for
payments would thereby end up outside Sweden's borders and are thus mulling over
whether some kind of domestic back-up would be needed and over how the
ekrona could be paired with this as a complementary means of payment. This is
particularly important as we expect instant payments to become increasingly
important in the future.
The trend towards a cashless society has also continued - a trend that risks
leaving Sweden without functioning cash in the near future. My speech two years ago
was part of a proactive strategy to create different alternative courses of action
from this trend. As the e-krona is something new, it will take time to analyse and
perhaps develop such an alternative. This work must therefore be initiated in
good time, before cash usage has declined to such a point that cash is no longer a
generally accepted means of payment in Sweden.
The Riksbank's e-krona project: results and the way forward
In my speech, I introduced the discussion of the e-krona by asking whether the
Riksbank should adapt the money we issue to the modern, digital economy. I
emphasised then that the e-krona should be seen as a complement to cash, which
was in the process of becoming marginalised. I also pointed out the need of
working in parallel in three areas: investigating the technical possibilities, analysing the
consequences for, among other things, monetary policy, and reviewing the legal
issues to which a possible e-krona would give rise.
After two years, I can say that we have come quite far within all of these areas,
but also that we still have some way to go until we reach our goal. We have
discovered that it would be possible to develop an e-krona using existing technology,
but we will have to start constructing and testing a finished product to learn more
and to establish different alternatives for the Riksbank in the future. We have also
discovered that it is possible to design an e-krona that would not have excessive
consequences for monetary policy or financial stability.5
On the legal side, we
interpret this as meaning we have a mandate to issue a simpler, value-based variant
of the e-krona that we will develop as a pilot version. We also intend to approach
the Riksdag to propose legal amendments that will clarify our mandate and make
it possible to issue an account-based e-krona.
We need to prepare ourselves for a cashless future
As regards the rapid rate at which cash usage is declining, the Riksbank
Committee has submitted an interim report with a few proposed measures to brake this
development.6 The decline in cash usage that we are now witnessing is going too
fast for certain vulnerable groups who are unable to use digital technology or who
do not even have access to it. The Riksbank therefore welcomes the proposals
that the Riksbank Committee has submitted. The Riksbank has been requesting
protection for cash usage since 2016, when the Payment Accounts Directive was
introduced. I therefore consider it a welcome step that there is a broad political
will to speak with a clear voice in this matter and that the legislator intends to
increase its influence over this structural transformation so that it is not steered by
the private sector alone. The Riksbank Inquiry's proposal, supported by
representatives of all parties in the Riksdag, would ensure access to cash. However, as the
acceptance of cash in commerce is not legally required, the Inquiry's proposal will
not ensure that cash will remain usable in society.
Consequently, even if the measures proposed may help slow down this
development, I do not think that it will come completely to a halt. Streamlining within the
banking industry, for example via cashless bank branches, may certainly have re-
stricted the general public's ability to use cash, but other factors such as
technological progress, changed consumption patterns and the lack of legal
requirements forcing traders to accept cash are probably more important.
For example, in its report "Grundläggande betaltjänster i en digitaliserad framtid
(Essential payment services in a digitalised future)"7, the Swedish Post and
Telecom Authority (PTS) writes that "even if the cash infrastructure is maintained and
cash is available, cash will not necessarily be fully usable in the future". The most
recent results of the Riksbank's survey of payment patterns in Sweden also show
that the proportion paying in cash is continuing to decrease, while Swish
payments are increasing. So, even if the proposals of the Riksbank Inquiry were to be
realised, there would be nothing to prevent shops and other establishments from
refusing to accept cash. Neither is there any way to induce consumers to use cash.
This development seems to be steered at least as much by demand as by supply.8
In other words, the tendencies that led us to start our analysis of the e-krona are
continuing. And neither is the Riksbank alone in analysing this issue. Many other
central banks are expending resources in investigating digital central bank money
and a number have already conducted experiments or developed pilot versions.9
The Riksbank has met with many other central banks, politicians with
responsibility in Sweden and representatives of the private sector. Reactions have varied
from great enthusiasm to great scepticism. The banking sector in particular often
argues that an e-krona is not needed and that launching one would be an
intrusion into the private sector. But the Riksbank's presence on the market and
competition with the private sector's payment services are actually nothing new.
When private banknotes were first issued in the 1830s, the Riksbank had already
been active in the issuance of banknotes for over 100 years.10 The state started
Postgirot in the mid-1920s to secure a national payment system, over 30 years
before the private banks got started with Bankgirot. History shows that innovative
capacity in the private sector functions best when it can use state infrastructure
and clear regulations that develop apace with the possibilities offered by
technology as a launching pad.11 And, if the payment market is to be privatised
completely, an active decision should be required in this case from the legislator
regarding choosing such a new direction. It cannot be allowed to just happen.
Confidence in money is a socio-economic asset
Since confidence in money among the general public is a public good, there is a
social benefit in monitoring the development of the payment market. The
confidence that has been built up is a kind of social capital and there are many
examples from other countries of how badly it can go when confidence in money is
lost.
Theoretically, it is often assumed that the possibility of converting private bank
money into secure central bank money is a basic precondition for maintaining
confidence in privately issued money.12 Above all in times of financial unease,
problems can arise when confidence in the private banks' money can rapidly
collapse. The question is what happens in a financial crisis if confidence in the entire
banking sector sinks. Would there be problems if, in the future, it became
impossible to switch from commercial bank money to central bank money?
Issuing an e-krona is sometimes described as something revolutionary and, in
principle, I share this opinion. However, how revolutionary it will be depends, to a
great extent, on how the e-krona is designed. If it were to be approximately the
same as cash but stored in a card or another physical unit, the consequences for
the payment market, monetary policy and the financial system would generally be
minor. The more popular the e-krona were to become, the greater the
consequences would be, of course: greater competition with depositing in banks and
greater risks for the Riksbank's balance sheet, for example. Careful analysis and
calibration is therefore required here. It is also therefore wise to proceed with
caution.
At the same time, we must stand prepared with a state solution if cash becomes
completely marginalised, which could happen quickly.13 Judicious government
intervention in the payment market cannot be consigned to history. In my opinion,
the presence of the state will also be needed in the future to allow us to manage
the different problems that could arise if state-issued means of payment
(banknotes and coins) were to vanish entirely from the payment market.
The alternative to the e-krona, increased regulation, could be difficult and
expensive
One conceivable alternative to the introduction of an e-krona would be for central
government to intervene with increased regulation of the payment market to
ensure safeguard objectives that private agents may not see as important but which
are important for society. These include objectives such as general accessibility,
resilience and innovative capacity. However, achieving both efficiency and
security via regulation on a market like the payment market may be complicated.
Allow me to explain why. In general, we usually consider competition to be good for
achieving cost-effectiveness and innovation on a market. However, this does not
apply to all types of market. In economics, we talk about 'natural monopolies'.
These arise on markets where major investments in infrastructure are needed and
where the cost of serving an additional customer is low. A common example of
such a market is the water system, where large investments are needed to lay
water pipes and extend sewage systems. It would not be efficient to have two
different companies digging up the streets and competing to supply water. In addition,
once a system is in place, it is difficult for a competitor to enter the market and
thus a monopoly arises.
On the payment market, we have what is basically a similar situation, requiring
major investments in IT infrastructure, which easily leads to a monopoly situation
with one dominant company. So far, however, cash has always been available as
an alternative that restricts the monopoly's chances of exploiting its power.14
Often it is central government that is responsible for production on markets with
natural monopolies, but a private company can also have a monopoly at the same
time as the state intervenes and regulates prices.15 If the company were allowed
to set the price itself, excess profits would arise, in addition to which quantities of
the product would be too small and/or the quality too poor, as in all monopoly
situations.
On the payment market, there are also economic advantages in the participants
using the same infrastructure. For the consumer, it is convenient if the same
solution works everywhere the consumer makes a payment. We would prefer not to
need one card for each shop, another for parking, using public transport and so
on. This means that so-called network effects arise, as the more people who join
the same system, the better it is for everybody in the system. However, this also
means that it is difficult to set up normal competition on the market.
In addition to problems in achieving the right pricing and quantity, there are also
other aspects that must be considered in the event that the state-issued means of
payment disappears from the payment market in the future. Social welfare
maximisation is a broader goal than private actors' interest in maximising their profits.
For example, it is important for central government to achieve a good balance
between socio-economic risks and costs. Central government also takes account of
factors connected with ensuring accessibility for all groups in society, resilience to
shocks, preparedness and equal conditions regardless of where in the country
users may live, for example. What I want to say is that it would probably require
increased state governance and quite extensive resources to ensure that the private
market delivered on all these points. What would be required is something that
needs to be analysed further in parallel with the analysis of the e-krona.
The alternative to regulation is for the Riksbank to continue to supply a means of
payment that sets the standard for the country's means of payment and that also
exposes the private sector to a certain amount of competitive pressure, just as we
have done for 350 years.
Several measures are needed for resilience on the payment market
The Riksbank also carries out other work than the analysis of the e-krona to
safeguard the resilience of the payment market. For example, we are working within
the framework of the Swedish Retail Payments Council to survey the possibilities
of making card payments and withdrawing cash in an offline situation, which is to
say when disruptions have made it impossible to check the balance of the account
or credit to which a card is linked.16 At present, certain cards do not function at all
in an offline situation, while others do.
If we were to be impacted by a complete breakdown of both the Internet and
telecommunications, it would not be possible to withdraw cash. Consequently, we
cannot, at present, rely upon cash being available in a crisis situation. It is possible
that the e-krona could play a role for Sweden's crisis preparedness. But in any
case, the Riksbank needs to clarify its role as provider of money in appropriate
forms in a crisis situation. In the same way as the Riksbank is 'lender of last resort'
for the banking system, we have a responsibility to enable payments in a crisis, to
be a 'money provider of last resort'.
Personal reflections
Two years of intensive work on the e-krona have now passed and I will be leaving
the chairmanship of the steering group as the project enters the next phase. It has
been two incredibly educational years, but I think it is still too early for me to
decide whether or not I shall support an e-krona for the general public in the future.
As has hopefully been clear from my earlier reasoning, this depends on whether it
emerges that there are better alternatives to guarantee both the security and
efficiency of the payment market. And to answer this, the analysis needs to continue.
At the Riksbank, we will work in two parallel tracks: partly, we will develop the
pilot version of a simpler form of the e-krona and learn the lessons that may be
needed if it turns out that an e-krona is to be issued. And partly we will deepen
our analysis of the consequences for Sweden if the payment market should
become entirely privatised. In collaboration with other parties in society, we need to
discuss which characteristics should be prioritised for an e-krona and make
costbenefit analyses of various alternative solutions to the problems we see that the
e-krona could solve. For example, if we conclude that the e-krona is needed for
contingency purposes, this may lead to characteristics such as offline functions
being prioritised, while other characteristics may be prioritised if other aspects
turn out to be more important.
As the payment market is an infrastructure that is fundamental for Sweden's
economy to function, questions of this type must ultimately be determined by our
legislators in the Riksdag. In our talks with agencies that make state
disbursements, we have noticed that these could be rationalised with the help of an
ekrona. It is possible that the best route would be to build the e-krona together
with others. The Riksbank also intends to review the legislative amendments that
may need to be implemented to provide us with a clear mandate in the issue.
If the e-krona is to be realised, I believe that the best solution would be for the
Riksbank to provide the e-krona via our balance sheet but that the private sector
then be involved in its distribution. Private companies are better at handling
customer contacts and finding the tailor-made solutions that the general public
demands.
Equipping ourselves for the future
My speech in 2016 had the heading "Should the Riksbank issue e-krona?" After
two years of analysis, we now know that the technological possibility exists and
we know a bit more about how the design of the e-krona can affect the
consequences for financial stability and monetary policy. We are also working to ensure
that the means of payment issued by the Riksbank will have legal support, even in
a digital future. But it is too early to be able to answer fully the question of
whether the Riksbank should issue a broader variant of the e-krona to the general
public. Ultimately, this is a political decision, for which the Riksbank, as an expert
authority, needs to be prepared to provide advice and suggest solutions.
By starting the analysis and creating alternative courses of action, we have made
sure we stand better equipped should cash be marginalised further in the future.
As Benjamin Franklin famously said: "by failing to prepare, you are preparing to
fail".