Stefan Ingves, Governor of Riksbank (©Riksbank)
Obserwator Finansowy: Governor, Sweden is proud to have issued the first banknote in Europe, which dates back to 1661. Today, the use of cash in transactions in Sweden is one of the lowest in the world. Could you please elaborate on the drivers of the declining trend in the use of cash in Sweden in recent years?
Stefan Ingves: There are multiple factors behind the decline of cash transactions in Sweden, but the main driver has been the development and widespread usage of safe and easy-to-use digital payment alternatives. Debit and credit cards have been around for years, of course, but recent innovations on the receiving side have broadened the acceptance significantly. Even when you buy fruit from a vendor on a town square or go to a flea market in the countryside you can usually pay by card. Adding to this, Swedish banks have jointly developed a payment application for smartphones, called Swish, which offers digital real-time payments between accounts in different banks. This solution has turned out to be hugely popular, especially for payments between individuals. I saw the results from a survey a couple of weeks ago that showed that approximately three out of four Swedes had used Swish within the last week. There are also other factors that have affected the use of cash. For example, there have been initiatives by lawmakers and other authorities targeted at some of the negative effects arising from cash’ characteristic of being non-traceable, such as tax evasion. The Riksbank also pursued a relatively swift coins and banknotes changeover between 2015 and 2017 that may have entailed costs for some who had savings in cash. This seems to have had a negative effect on the public’s willingness to hold cash. Overall, however, I think the technological development and a general predisposition among Swedes for embracing this has played the leading role in driving cash usage downwards in Sweden.
Has the declining use of cash so far affected in any tangible way the Riksbank’s core functions and its ability to deliver the goals it has been mandated? More generally, do you see any negative effects related to the marginalization of cash in Sweden?
As to your first question, the Riksbank’s responsibilities are to ensure that that money retains its value and that payments can be made safely and efficiently. We are also responsible for providing enough banknotes and coins to meet the public demand. The declining use of cash has of course changed the relative size of different functions in the Riksbank. As an example, our cash management function has decreased over the years while the payment system function has grown. But payments are still safe and efficient, and we still supply the public with enough cash to meet the demand.
However, the declining use of cash has driven many businesses, some commercial banks included, to become completely cash free. There are in fact very few bank branches that provide manual cash services to the public in Sweden today. I find this development concerning. It is very problematic for those who either still want to use cash or for any reason need to use it. In addition, the infrastructure surrounding cash handling has decreased and is continuously decreasing, which makes payments more dependent on electrical networks and internet connectivity. It is important that the cash infrastructure is maintained on a high enough level for cash to function in a continuity or crisis preparedness perspective. But it is also important for the Riksbank to adapt to these changes and give the general public access to an easy-to-use CBDC, or e-krona as we call it, as a complement to cash.
In the initial phase of Covid-19 pandemic many countries noted a considerable increase in demand for cash. How did the situation look like in Sweden?
We noticed a marginal increase in cash demand in the very beginning of the pandemic, but the demand plummeted almost immediately to levels around 20 percent lower than in 2019. A natural explanation to this drastic decrease in cash demand is that large parts of the population, like everywhere in the world, stayed home. Consequently much shopping moved from physical stores to the internet. Also, many of those who used cash for person-to-person transactions moved to digital payment solutions for those transactions. As an example of this, Swish has grown significantly among the elderly population during the pandemic. These kinds of changes in payment behaviour tend to stick, and it is therefore likely that the pandemic has spurred a permanent shift towards digital payments. Another thing I would like to point out is that the pandemic has also been a driver for business becoming cash free, which, as I mentioned earlier, is becoming more and more common in Sweden. If you walk around any town in Sweden it is nowadays commonplace to see shops and restaurants having put up notes saying that they do not accept cash to help prevent the Covid-19 virus from spreading. As I am sure you know, studies in this matter show that the risk for the virus transmitting via cash is very low. We have, together with our public health authority and market actors, actively communicated this, unfortunately with little effect.
Although some commentators treat cash payments as a symbol of backwardness, in many countries cash still remains an important mean of payment. In particular, it can enhance resilience of payments to such events as power outages or cyberattacks. Has Riksbank undertaken any steps in order to stem further decrease in the use of cash?
I agree that cash has an important function in enhancing the resilience of payments and crisis preparedness. It is currently also the only way that the general public can access central bank money, the safest form of money. It is an important task for the Riksbank to ensure the supply of cash in case of disruptions in the digital payment system. But, as I touched upon earlier, in order for cash to maintain this role as a fall-back means of payment in crisis situations it is important that the infrastructure is preserved and that society is still able to handle cash. Cash services, such as points for withdrawals and deposits, must be accessible to all. Also, providers of essential services need to be able to handle cash under normal conditions if we expect them to be able to do it during extraordinary conditions. And, as I mentioned earlier, very few bank branches handle cash manually which increases cash dependence on electricity and data communication.
In Sweden, cash is certainly under pressure fulfilling its role as legal tender. The Sveriges Riksbank Act states that cash is to be accepted as payment everywhere, but the rule can be waived by agreement by shops, restaurants, and other businesses via freedom of contract. If legal tender does not receive a stronger legal protection there is a risk that cash will be practically impossible to use in the future. This is a problem that needs to be addressed by the Swedish legislators. The Riksbank has continuously pointed out to the government and parliament that legal tender needs stronger protection. My opinion is that essential businesses, such as larger grocery stores, pharmacies and gas stations should not be allowed to discriminate against cash.
Riksbank first hinted to the possible use of CBDC already in 2016. Since 2017 you have been carrying out the e-krona project. Was the declining trend in the use of cash the only motive behind the decision to launch the e-krona project? Or were there other relevant factors that induced Riksbank to embark on this project?
The strong movement in Sweden towards a cashless society, as described, was certainly the main factor behind our decision to explore a digital currency. With a continued marginalization of cash, the e-krona could ensure that the general public still had access to money issued by the central bank – state money, if you like. Or, put differently, we would avoid a situation where consumers and businesses in Sweden became fully reliant on the private market to make payments. Besides, the e-krona could increase both the efficiency and the stability of the payment system as a whole – efficiency by providing a broadly accessible infrastructure that may foster competition and innovation, and stability by offering an alternate way of paying that could work also in a crisis situation. The latter covers also disruptions in existing payment systems. Finally, the e-krona could also facilitate the development of easy-to-use digital payment solutions for people that prefer cash due to its simplicity.
What are the main conclusions regarding the potential introduction of the e-krona that have been reached so far? Has Riksbank identified any conditio sine qua non for the e-krona project to be successfully launched?
First, I need to stress that no decision has been taken yet with respect to the e-krona. We are underway with a pilot study to learn more about the technical details of a digital currency and its regulatory aspects. Also the legal fundamentals have to be in place, which is not currently the case. Early in the process, the Riksbank submitted a proposal to the Swedish parliament to appoint a group of experts to analyze the need for the e-krona and the role of the public and private sector on the payment market. This has now been taken up by the parliament which has initiated a formal inquiry of the responsibility of the state, including the Riksbank, regarding payments. The inquiry will be concluded late 2022 and cover also the important concept of legal tender which I referred to earlier. There is no doubt in my mind that for a digital currency to eventually succeed, it needs to have the same status as notes and coins, that is, the definition of legal tender should be technically neutral. This is at least one conditio sine qua non, as I see it.
Let us shortly discuss key functionalities of the e-krona. What role will commercial banks play in the access process to the e-krona as well as in the circulation of the CBDC? What is the risk that an introduction of the e-krona reinforce social exclusion of certain groups? Would the e-krona, if introduced, provide the users with the same degree of anonymity as cash? If so, what challenges would it pose to anti-money laundering policies?
Like I said before, we have not yet taken any decision on the e-krona, we are only in the process of analyzing and testing the various design questions. However, if the e-krona is launched a network, or an ecosystem, of service providers between the Riksbank and end-users will need to be established. Banks are expected to play an important part in this making sure that exchanges between the e-krona and private money, deposits on bank accounts, become a seamless experience. Depending on the technical set-up, it may also be the banks’ task to verify transactions and keep track of end-users’ e-krona belongings. Still, being different from holding deposits – the e-krona are liabilities of the Riksbank, and not those of the service providers – this could be open also to non-banks. Also, having the end-user relationship the service providers will also be assigned duties stemming from anti-money laundering and counter-terrorism financing requirements which obviously need to be fulfilled. Notably, anonymous use of the e-krona is not being strived for, irrespective of this being a feasible option or not. Already today, there are strict limitations on anonymity, and they should be complied with by the e-krona as well, of course. At the same time, integrity and data privacy must also be respected.
Another aspect to consider when talking about CBDC is its safety. Do you believe that it is technically possible to launch a fully safe CBDC that would be resilient to e.g. cyberattacks or fraud? In this context, will the e-krona offer an offline functionality that could be resilient e.g. to power outages?
It goes without saying that safety is a top-priority when considering a digital currency. As long as there has been cash in circulation, we have witnessed as race between counterfeiters improving their reproduction technology and central banks enhancing the security features of notes and coins. Without neglecting the importance of winning that race, the harm to society that one advanced counterfeiter can do is still fairly curbed, you may argue. This could change dramatically with a digital currency if central banks and their technical providers don’t do their homework properly – if such a currency is launched without obeying to the strictest conceivable requirements in terms of system resilience and robustness. This is a main focus area of our pilot study together with a possible offline functionality which could broaden the use of the e-krona and improve its value as a fall-back payment solution. I am also aware, though, that such a functionality raises challenges with currently known technologies, and this is something that needs to be investigated further. The Riksbank, as well as many other central banks working on digital currencies, will continue to explore technical and regulatory solutions in order to provide secure offline capabilities.
Today Riksbank, similarly to many other central banks, maintains the interest rates close to zero. Do you believe that an introduction of CBDC may be considered by central banks as an opportunity to eliminate the challenges that the effective lower bound to nominal interest rates poses for monetary policy?
At the Riksbank, we have been clear from the beginning that our interest in a digital currency is not driven by monetary policy considerations. We have not embarked on this journey to get an additional monetary policy tool or to overcome the lower bound of nominal interest rates. Neither has this been the starting point of most other central banks analyzing the prospects of a digital currency, I understand. Together, we investigate how such a currency can be launched without distortionary effects on monetary policy implementation and transmission – how we can avoid harming monetary policy, as it is sometimes phrased. Please notice, though, that we do not rule out an interest-bearing digital currency – far from it, I would like to emphasize. But, and this is my main point, the purpose of a possible e-krona has never been to achieve something which is unachievable with our current monetary policy toolbox. Also, as we will carry on issuing cash, a lower bound of nominal interest will continue to exist.
It is widely discussed that after an introduction of CBDC, commercial banks would see an outflow of deposits to this new, risk-free form of money. In case of an increased outflow – which could happen especially in the times of market distress – the central bank would need to step in and provide liquidity for commercial banks. As a result, the role of the central bank in crediting the economy would increase. The central bank would become not only a lender of last resort but a regular lender to the banks. What is your view on this front?
When discussing the effects of a digital currency on financial stability, we have to distinguish between normal times and periods of financial unrest. In times of “plain sailing”, banks’ ability to transform savings into lending will not be materially affected. Depending again on its design, a digital currency could slightly increase banks’ funding costs as they may have to raise interest rates on deposits or turn to more wholesale borrowing, for instance by issuing bonds. But all calibrations that I am aware of show that the effect will be marginal – and the more attractive deposit-linked services the banks offer, the more so.
Banks in crisis, however, may set other mechanisms in motion. In such a scenario, a digital currency could potentially be a destabilising factor by easing bank runs, the moving of bank deposits to safer assets, the argument goes. This is a possible drawback of a digital currency that needs to be acknowledged. At the same time, the ease of moving funds in and out of bank accounts has already increased significantly in recent years due to the widespread launch of faster payment systems. Also, as you indicate, central banks can alleviate the pressure by providing, in principle unlimited, credit to banks in distress. In general, the Riksbank has a large toolbox to manage situations with a confidence crisis in the banking system.
It is also an important point, I think, that the e-krona may actually in certain ways strengthen the banking system. For instance, the e-krona would make it possible to rapidly deal with a bank run by supplying e-kronas to those who want to withdraw money from their bank accounts. By making the process more effective than it is with cash today, this could reduce the risk of contagion between banks. Basically, if people know that it is easy to withdraw money, the risk of a bank-run should decline. It may also be that banks become less likely to take excessive risks if deposits become more volatile. All in all, I don’t believe that the central bank would become a larger and more regular lender to banks due to a digital currency.
Bob Dylan famously sung “The Times They Are a-Changin’”. And for sure, payments systems “are a-changin’” as well. However, in many countries, also in the European ones, cash still holds well despite an impressive progress in electronic payments in recent years, and the payment system provides households and firms with a high level of functionality. Do you believe that also in these countries CBDC could be soon considered as a “must-have” for the central banks and the payment systems?
Clearly, the question is most urgent in countries like Sweden where cash is on the verge of disappearing. Having said that, with digitalization running at full speed other countries could soon find themselves in a similar situation. In addition, as the implementation lead time for a digital currency is long, starting the analysis and preparatory work early is probably a no regret. Still, whether a digital currency is a “must-have” is of course an open question. Perhaps, we should for now allow the answer to be “blowing in the wind”, as Mr. Dylan also legendarily sings.
– Interview by Piotr Szpunar
Stefan Ingves is Governor of Sveriges Riksbank and Chairman of the Executive Board. He is a Member of the Board of Directors of the BIS and Chairman of the BIS Banking and Risk Management Committee (BRC). Governor Ingves is also a Member of the General Council of the ECB and First Vice-Chair of the European Systemic Risk Board (ESIB). He is also Governor for Sweden in the IMF and Chairman of the Toronto Centre for Global Leadership in Financial Supervision and Board Member of the Nordic Baltic Macroprudential Forum (NBMF).
Stefan Ingves has previously been Chairman of the Basel Committee on Banking Supervision. Director of the Monetary and Financial Systems Department at the IMF, Deputy Governor of the Riksbank and General Director of the Swedish Bank Support Authority. Prior to that he was Head of the Financial Markets Department at the Ministry of Finance. Stefan Ingves hold a PhD in economics.