Currency Clash or Coexistence? Riksbank Memo Explores Implications of Digital Euro for Financial Stability in Sweden
In Brief
Sveriges Riksbank predicts the Swedish krona will remain the primary currency despite potential digital euro adoption, citing strong institutional considerations to prevent the squeeze.
A recent research by Sveriges Riksbank indicates that the Swedish krona will remain the country’s primary currency despite the possible arrival of a digital euro. The Swedish payment system and economy may be affected to some extent by the adoption of a digital currency issued by the European Central Bank (ECB), but the central bank contends that strong institutional considerations will probably keep the krona from being squeezed out.
What Is Digital Euro?
A prospective central bank digital currency (CBDC) that the European Central Bank may produce to complement cash euros is known as the “digital euro.” In essence, it would be retail payments using an electronic version of central bank currency.
As envisioned, the digital euro would be a cutting-edge payment method that gives customers and companies more options, particularly in circumstances when using actual currency is difficult. It is meant to be used in addition to cash, not as a full substitute.
Some key characteristics of the ECB’s planned digital euro include:
- Direct Claim on Central Bank
Like cash, the digital euro would be a direct claim on the ECB, classified as central bank money and legal tender. This differentiates it from existing electronic payment methods like cards or mobile apps, which still rely on commercial bank money.
- Pan-Euro Area Acceptance
The digital euro is designed to be universally accepted for payments across the entire euro area, providing a unified digital payment option alongside euro banknotes and coins.
- Privacy Protection
While offering less privacy than cash, the digital euro aims to provide a sufficient level of privacy for lower-value transactions through mechanisms like anonymity vouchers and privacy-enhancing technologies.
- Holding Limits
To address financial stability risks around bank disintermediation, the ECB plans to cap how much digital euro individuals can hold, possibly around €3,000-4,000.
- User Accessibility
Any eurozone resident or visitor would be able to open a digital euro account and wallet through a payment provider to make digital payments. The CBDC aims to promote financial inclusion.
The digital euro is still in the planning stages, with the ECB currently in a 24-month “preparation” phase to finalise core aspects like distribution model, technology platform, legal foundations, and involvement of private sector partners. A final decision on whether to actually issue the digital euro will come after this phase concludes.
The Swedish Case
In an internal note released recently, the Riksbank examined the possible effects of a digital euro on Sweden. The research takes into account two possible outcomes as the ECB continues to investigate the possibility of a central bank digital currency (CBDC) for the EU: one in which Sweden signs an arrangement for its citizens to use the electronic euro and the other in the absence of such an agreement.
The Riksbank thinks the general effect will be minimal, even in the case where Swedish enterprises and consumers have complete access to the electronic euro through an “Article 18” agreement with the ECB. The underlying premise of this is that the adoption of the Swedish digital euro is not expected to reach a “tipping point” that would cause the krona to be replaced more quickly.
Key Institutional Factors Protecting the Krona
The staff memo highlights several institutional factors that should serve to anchor the Swedish krona’s role as the primary currency in the country, limiting any crowding-out effect from a digital euro:
Official Currency Status
One important safeguard is the krona’s status as Sweden’s official currency, with all transfers to and from the public sector being in kronor. “Given we pay our taxes in Swedish kronor, we also prefer to receive our salary in Swedish kronor,” the note reads. Companies will probably keep pricing their products and offerings in the local currency as long as they pay wages and other significant costs in kronor.
Currency Exchange Costs
Most Swedish wealth is held in kronor, so using a digital euro would require currency conversion costs. This transaction cost should curb the tendency to switch to paying in euros.
Exchange Rate Regime
Sweden’s floating exchange rate means euro holdings entail currency risk, which could dampen households’ interest in holding significant digital euro balances.
Pricing Conventions
With currency risk from the floating exchange rate, retailers may be less inclined to price goods in both kronor and euro to avoid currency arbitrage.
Potential Risk Factors
While these institutional factors provide a buffer, the memo acknowledges some risk factors that could increase digital euro adoption in Sweden:
- High inflation causing a “flight to quality” into euro holdings;
- Poor quality and high costs in Sweden’s payment system;
- Сross-border euro usage pressure.
However, the Riksbank asserts that as long as these risk factors do not reach a tipping point, the krona’s position should remain secure.
Limited Financial Stability Impact
Regarding financial stability implications, the analysis suggests any impact would likely be modest. This is due to the ECB’s plans to cap individual digital euro holdings, limiting potential deposit outflows from banks.
Even in an extreme scenario where every Sweden over 15 held the maximum digital euro amount, the relative impact on bank deposits would only be around 2% of total assets. One area where the digital euro could benefit Sweden is through improving cross-border payments if the digital euro and a potential future “e-krona” CBDC are interoperable.
The memo states, “A co-existing digital euro and e-krona could improve cross-border payments through interoperability.”
Overall, the Riksbank analysis concludes that the emergence of a digital euro actually strengthens the case for Sweden to introduce its own e-krona CBDC: “Firstly, with a digital euro ‘in use’ in Sweden and an Article 18 agreement in place, an e-krona will serve to safeguard the current role of the Swedish krona.”
An e-krona could counterbalance digital euro adoption while also potentially reducing complexity through shared technology and standards. Additionally, an e-krona complementing the digital euro could “facilitate the development of pan-European and interoperable retail payment solutions.”
While holding off on recommending if Sweden should pursue an Article 18 agreement, the Riksbank states the decision should be carefully analysed following clarification on the final digital euro design and legal framework.
However, based on its analysis, the central bank clearly believes institutional factors and a possible e-krona can prevent the digital euro from challenging the primacy of the Swedish krona within the nation’s borders.
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About The Author
Victoria is a writer on a variety of technology topics including Web3.0, AI and cryptocurrencies. Her extensive experience allows her to write insightful articles for the wider audience.
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Victoria is a writer on a variety of technology topics including Web3.0, AI and cryptocurrencies. Her extensive experience allows her to write insightful articles for the wider audience.
