Sweden is leading the charge towards a cashless future. A report highlighted that only 8% of Swedes used cash to make their last payment, it’s no surprise then that Sweden is interested in launching a Central Bank Digital Currency (CBDC). The Riksbank, Sweden’s central bank, has been testing a digital version of the krona, called the E-krona, exploring it as a complement to cash. Let’s discuss Sweden’s e-krona project in depth.
What is E-krona?
As stated, the e-krona is a digital form of the Swedish krona currency, issued by the Riksbank, Sweden’s central bank. Just like cryptocurrencies, e-krona is based on blockchain technology. However, the e-krona is centralized and backed by the full faith and credit of the Swedish government. This means it carries the same legal tender status as physical banknotes and coins.
More about Sweden’s e-krona project
Started by the Riksbank in 2017, the e-krona project involves researching and developing a CBDC. The Riksbank is exploring various aspects of the e-krona, including its design, distribution, and impact on the financial system.
In the fourth phase, Riksbank is exploring ways to make its digital currency, the e-krona, usable even when there’s no internet or mobile connection. Here’s a breakdown of the key points:
- Shadow wallet: The e-krona for offline use is stored in a “shadow wallet” within the online system. This is essentially a digital reserve.
- Payment card: A physical payment card holds information about the shadow wallet’s balance and tracks offline transactions.
- No physical E-krona: The actual e-krona remains in the online system. The card is just a tool for recording transactions.
- Synchronization: When the connection is restored, the offline transactions are synced with the online system, updating the shadow wallet balance.
- Difference from phase 2: This method differs from an earlier attempt where copies of the e-krona were physically transferred to the payment card.
Implications
- Security: Keeping the e-krona in the online system might enhance security as the risk of losing or compromising the digital currency is reduced.
- Efficiency: The system might be more efficient as there’s no need to transfer e-krona back and forth between online and offline environments.
Ensuring timely synchronization and managing liquidity issues in shadow wallets are challenges that need to be addressed.
Riksbank’s e-krona reports
The Riksbank has conducted research and development on the e-krona, publishing comprehensive reports outlining its findings and progress. These reports discuss various aspects of the project, including:
- Technical architecture: Exploring the underlying technology and infrastructure required for an e-krona.
- Distribution and access: Investigating how the e-krona would be distributed and accessed by the public.
- Privacy and data protection: Addressing concerns about user privacy and data security.
- Economic impact: Analyzing the effects of an e-krona on the Swedish economy, financial system, and monetary policy.
- Offline capabilities: Exploring the feasibility of using the e-krona for offline transactions.
Through these reports, the Riksbank has gained insights into the challenges and opportunities associated with issuing a CBDC.
So far the bank has released four reports. The fourth and final report was released on March 20, 2024 based on its findings from its fourth e-krona pilot. In this report, the central bank concluded offline e-krona payments are feasible but highlighted security challenges as well.
To enhance security, in the fourth phase, Riksbank opted for payment cards over mobile phones as the primary offline payment method. Strict security measures, such as transaction limits and card replacement requirements were imposed. These restrictions, while necessary, negatively impacted user convenience, especially for peer-to-peer payments and in situations where multiple offline transactions are needed.
Additionally, the need to regularly top up e-krona balances online before going offline presents another hurdle, particularly for those who live in areas where internet is not easily available.
Offline CBDC payments
Unlike traditional digital currencies that rely on internet connectivity, an offline CBDC would allow transactions to be conducted without an internet connection.
Key challenges for offline e-krona payments:
- Technical feasibility: Developing a system that enables secure offline transactions while maintaining data integrity.
- User experience: Ensuring a user-friendly experience for offline payments.
- Security: Protecting against fraud and counterfeiting in an offline environment.
- Data privacy: Balancing the need for offline transactions with data protection requirements.
The Riksbank’s research in this area is crucial for the widespread adoption of the e-krona, especially in regions with limited internet access.
Future of e-krona in Sweden
The Riksbank is taking a proactive approach to the implementation of an e-krona.
- Early legislative preparation: The Riksbank emphasizes the need to start drafting legislation for an e-krona now, even if its launch is uncertain. This is to expedite the process should the decision to proceed be made.
- External factors: The Riksbank is closely monitoring global developments, particularly the ECB’s work on the digital euro and the EU’s related legislative proposals.
- Ensuring payment system resilience: The e-krona is seen as a tool to maintain the Riksbank’s responsibility for safe, efficient, and accessible payments in an evolving payment landscape.
Essentially, the Riksbank is positioning itself to be prepared for a future where digital currencies may become the norm. The e-krona project has the potential to redefine the way Swedes interact with money, offering increased convenience, security, and financial inclusion.
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