Whatever the advantages or disadvantages of central bank digital currency (CBDC), we aren’t going to get one anytime soon because we lack one of the crucial building blocks for a national digital currency that can deliver benefits to the new economy, and that is digital identity. If you want a case study, look at Sweden.
Where ABBA Leads, We Should Follow
Sweden is often cited in discussions of the future of cash, since it is one of the countries where cash is rarely used and a very useful case study of what happens where there is no national strategy around cash: Cash begins to vanish from the public sphere (because merchants don’t want it and customers don’t bother carrying it, not because of any explicit strategies). However, as the cash drains away, some groups are marginalised and excluded (which is why a strategy is needed). Homeless people may accept cards, but pensioners and refugees can be shut out by a cashless world.
However, the main reason why I have always been interested in the Swedish digital money trajectory is that in Sweden the supporters of cash-free commerce are a broad church, embracing not only banks and law enforcement but the trade unions and the retailers. And, of course, they had a great front man: Bjorn Ulvaeus from the pop phenomenon that is ABBA (still performing by hologram in London even as I write), who turned on cash after his son got robbed. He took the great step forward of making the ABBA museum cashless, and the country has never looked back.
It may seen implausible in the United States, but I regularly talk with people in Scandinavia who cannot remember when they last used cash. Transaction volumes have sunk to the point where handling is unprofitable for banks and merchants. And the impact is significant. Cash-related crimes such as bank robbery are down (twenty years ago Denmark had 200 bank robberies per annum, last year it had none) as is tax evasion. The black market appears to have contracted, just as Bjorn and others had hoped.
(Interestingly, and beyond the scope of this article, cryptocurrencies have so far failed to catch on in Sweden.)
There are problems with simply going cashless, though. When Swish (the instant payment app used by almost all Swedes) when down last year, it caused signifiant problems. This one of the reasons why CBDC needs to operate in parallel with and not on top of the bank payments networks.
Hence my interest in the progress of digital currency in Sweden. The Swedish central bank has just published its report on the third phase of its e-Krona project. They been looking at how an e-krona network could be integrated with bank systems, how the e-Krona might work in existing point-of-sale (POS) terminus and how an offline solution could work. They point to a number of lessons learned so far, including that a disadvantage of shared ledger technologies is the they are “often more complex and less efficient than more traditional account-based systems” and that shared ledgers and smart contracts may involve more information sharing than the Riksbank is comfortable with because of personal data protection and banking secrecy issues. All of which is bounded by their summary view that “it has not been decided whether the Riksbank will issue an e-krona, nor how it would function or what technology it would be based on”.
Their hesitation is entirely realistic. While there are inclusion, integrity and reliability issues that need to be addressed, the Swedish government’s own detailed (900 page) study has concluded after two year’s work that the case for an e-krona is not yet strong enough and recommended the central bank continue to study CBDC and return to Sweden’s parliament in 2024 with new proposals.
It’s All About ID
Writing in the Spring 2023 issue of the Journal of Payment Systems and Strategy, the respected payments expert Michael Salmon explores the right ecosystem for a central bank digital currency (CBDC) and notes that while financial inclusion is an objective of many central banks exploring CBDCs, “the problem of how to identify people efficiently and reliably will need to be solved before any CBDC can realistically be considered”. He is, as you would expect, wholly correct.
While the Swedish government’s report acknowledged that “too many people are stuck outside the digital system” and suggested pressuring banks in Sweden to offer so-called “low-risk accounts” with limited functions (similar to the basic bank account we have in the U.K., where something like 1m adults do not have a bank account) it more importantly calls on the government to create a proper national digital identity infrastructure.
Just like the U.K. and the U.S.A., Sweden lacks a state-issued digital ID. There, everyone uses the ID provided by the banks (which, as it happens, is currently being extended to include the national ID). That BankID has been around for years, it works and everyone uses it, but the fact is that it excludes many people, meaning they cannot use digital payment systems of any kind let alone get themselves some future CBDC wallet.
When it comes to FedCoin and BritCoin and e-Krona let’s not get ahead of ourselves: Until we do something about digital identity, then we’re not going to do anything about digital money.
Read the full article here