Sweden’s central bank has teamed up with one of the country’s biggest commercial banks and a Nordic IT services provider as its testing for a potential central bank digital currency (CBDC) takes a step – albeit on an experimental basis – into the ‘real world’.
The Riksbank is to start technical testing of the e-krona with Handelsbanken and TietoEVRY, according to a short statement posted on its website, confirming that its CBDC explorations are therefore progressing from featuring simulated participants to co-operation with real external participants in a ‘test’ environment.
Most central banks worldwide are researching or experimenting with CBDCs but few have made definite commitments to introduce them. The Riksbank has been seen as a frontrunner, with its initial motivation to investigate the possibilities triggered by the Scandinavian country’s well-documented decline in cash use.
News of Handelsbanken and TietoEVRY’s participation comes just weeks after the Riksbank released a report entitled ‘E-krona pilot Phase 1’, summarising lessons learned so far and its priorities ahead of its extension and expansion of its testing.
‘Involving external actors as participants in the test environment will make it possible for the Riksbank to evaluate the integration between the participants’ existing systems and the technical platform for the e-krona pilot,’ the central bank’snewly released statement says. ‘The Riksbank will, for instance, be testing an integration of the payment flows developed during the first year of the pilot with the participants’ internal systems.’
Handelsbanken and TietoEVRY step up
The Bahamas launched the first fully deployed digital version of a fiat currency last year and central banks collectively representing a fifth of the world’s population are likely to issue a general purpose CBDC in the next three years, according to Bank for International Settlements (BIS) research published in January. But the same research said that the majority of central banks were unlikely to issue CBDC in the foreseeable future.
Handelsbanken described its involvement in the e-krona project as ‘an opportunity to participate in what may prove to be one of the first publicly available digital currencies controlled by a central bank anywhere in the world’.
“The Riksbank and the Nordic payments market are leaders in their fields, and for Handelsbanken, this partnership gives us the opportunity to evaluate what benefits the currency may provide, as well as giving us the chance to create value for the bank [Handelsbanken], our customers and society in general,” said Handelsbanken’s head of Nordic payments, Benny Johansson.
TietoEVRY will develop and test the process of ‘inter-changeability’ between commercial money and e-krona and analyse how this can be done securely and efficiently, the company said in its own announcement.
More than 70 per cent of bank transfers in the Nordic region go through TietoEVRY’s payment systems, according to the Finland-headquartered firm.
“By taking this step, Riksbanken is reinforcing Sweden’s innovative culture and our position on the global fintech stage,” said Karin Schreil, TietoEVRY managing partner for Sweden.
Where the experimentation will focus
The Riksbank has already been working with Accenture on an exploration of the technical requirements of a potential e-krona based on blockchain.
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 that accompanied its 21-page report on phase one. Other unknowns include whether the e-krona will function without access to the internet – known as offline functionality.
Accenture will continue to be involved in new 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 Riksbank’s April report noted.
At a political level 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 just over 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 last October.