Sweden’s Riksbank has set out its priorities as it extends and expands the scope of its testing for a potential central bank digital currency (CBDC).
The central bank has been seen as a frontrunner in developing a CBDC, with its initial motivation to investigate the possibilities triggered by the Scandinavian country’s well-documented decline in cash use.
The Riksbank has been working with Accenture for the past year, looking into the technical requirements of a potential e-krona based on blockchain technology.
It has this week released a report entitled ‘E-krona pilot Phase 1’, summarising lessons learned and next steps as it moves into a second phase of the pilot that will involve participants outside the Riksbank.
These next steps will include involving potential distributors of the e-krona to test how a CBDC would integrate with their systems and continued analysis of the solution’s performance for retail payments.
The involvement of ‘market actors’ would take in institutions with a licence to provide payment services in Sweden, including e-money institutions as well as traditional commercial banks.
Phase two technical priorities
Testing to date has been based on distributed ledger technology (DLT) where the digital currency takes the form of ‘tokens’, digital units containing information on origins and value.
Specifically, an e-krona network was developed based on R3’s Corda blockchain platform. Central parts of the system were simulated, such as liquidity supply via the Riksbank’s settlement system, RIX, as well as distributors, end-users and payment instruments (mobile app, card and smart watches).
The technology is, however, so far untried ‘when it comes to processing retail payments in the magnitude and with the safety level required by a CBDC’, according to a Riksbank statement accompanying the 21-page report. Other unknowns include whether the e-krona will function without access to the internet – known as offline functionality. Further investigation of the capacity for offline payments is now planned.
Accenture will continue to be involved in the second pilot phase, which will also examine how an e-krona would integrate with existing point-of-sale terminals.
Other questions seeking resolution include the extent to which information stored in the blockchain’s transaction history can be regarded as information covered by banking secrecy; and the possibility of storing keys and tokens in different ways. The fact that keys and tokens are stored locally in the payment instrument increases vulnerability ‘as both of these can be lost in the same way as cash that is stored in a physical wallet,’ the report notes.
Politicians on the case
Speaking during a panel discussion at the Bank for International Settlements (BIS) Innovation Summit a couple of weeks ago, Riksbank senior adviser Hanna Armelius described the broader context of the central bank’s CBDC explorations.
“We have been looking at possible problems that a CBDC may cause and possible problems if we don’t have a CBDC,” Armelius told the online audience, saying that the ball was in the Swedish Parliament’s court to look into the legalities of issuing a CBDC and whether indeed “they [politicians] feel it would be a good idea”.
The Riksbank sent a petition to Sweden’s Riksdag (parliament) proposing an investigation into the state’s role in digital retail payments and the monetary system almost two years ago. In December last year, the government announced the launch of such an investigation, to be led by former Riksdag finance committee chairwoman Anna Kinberg Batra. A report is due to be published by the end of November 2022.
The Riksbank is among a small group of central banks that, together with the BIS, contributed to an influential joint-report entitled ‘Central Bank Digital Currencies: Foundational Principles and Core Features’ published in October last year.
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