Central Bank Digital Currency Infrastructure Award: Sveriges Riksbank

Sveriges Riksbank began exploring central bank digital currency (CBDC) in 2016, in response to a decline in cash usage. Cash in circulation as a percentage of GDP has fallen from around 4% in 2004 to around 1%. Meanwhile, the central bank’s latest survey showed only 13% of total household payments were made in cash.

At the time, then-deputy governor Cecilia Skingsley discussed whether the Riksbank should issue electronic payments, as “cash is no longer as easily accessible” in Sweden. In 2017, the renowned e-Krona project, as it has come to be known, was developed as a three-phase action plan.

Phase 3 is currently under way and is the latest stage of Sweden’s central bank’s foray into the realm of digital cash. After three years of research, it has launched the first stage of its CBDC pilot. Working with Accenture, the Riksbank is testing payment, deposit and transfer capabilities for a digital version of the Swedish krona.

Through Accenture, the bank has partnered with distributed ledger firm R3 and will use its platform, Corda, to test other features of the prototype. The e-Krona pilot is scheduled to run until February 2021, but there is an option to extend the assignment for up to seven years, pending results.

“The Riksbank is considering potential areas that would be of interest for a deepened analysis in an extension of the pilot project,” says Johan Schmalholz, payment expert in the pilot division. This could include research into the “reliable integration between the e-Krona network and the real-time gross settlement (RTGS) of the Riksbank”.

Pilot users will interact with current financial market infrastructure and settlement systems via simulation in the e-Krona test environment. Similar to the existing two-tier financial system, the test environment comprises two levels. However, the e-Krona network is a standalone system, and all transactions are made separately from existing payment services.

The Riksbank will first issue e-krona to trusted financial intermediaries by way of ‘participant nodes’ – new participants can only be approved and added to the network by the Riksbank. e-Krona will then be distributed to end-user digital wallets by participant nodes at the second tier. When pilot network participants acquire and/or redeem e-krona, the participant nodes will debit or credit against their reserves. Alternatively, a representative of the Riksbank’s settlement system (RIX) can record the transfer.

According to the central bank’s white paper, the e-Krona network will be supplied with liquidity by the participants, paying in reserves in RIX in exchange for the Riksbank providing the participant’s node with the same amount of e-krona. “Participants, interconnections between participants and the RTGS of the Riksbank are all simulated,” says Schmalholz.  

Given the structure of Sweden’s payment infrastructure, if launched, e-krona could be the world’s first widely accepted central bank digital currency. “The Swedish parliament has decided to conduct an inquiry entitled The future of the Swedish state on the payment market before any decision is taken regarding issuance,” explains Schmalholz.

The central bank has come a long way from phase 1 of the project, which began in the first quarter of 2017. A group of central bankers were asked to assess various options with the view to updating electronic payment infrastructure. Staff were asked to develop proposals that analysed the benefits and risks associated with an e-krona system, which was then reviewed by the executive board.

In September 2017, an interim report was released, outlining two board-approved, feasible e-krona models: a register-based model, where a central database would house e-Krona accounts; and a value-based model, where e-krona would be held locally, mimicking cash.

Later that year, the Riksbank began phase 2. Using the phase 1 interim report as a base, the project aimed to create a governance and management structure for a CBDC system. In October 2018, the Riksbank published its second interim project report, discussing the requirements for the potential e-Krona design. In this report, the central bank began exploring in-depth the potential monetary policy and financial stability repercussions of CBDC issuance.

The report also included a proposal for the Riksbank to begin an e-Krona pilot program that would ready the system for a potential launch if the central bank decided to roll out the CBDC. According to the proposal, “the initial focus will be on an e-krona that constitutes a prepaid value (electronic money) without interest and with traceable transactions.”

In June 2019, the Riksbank announced that it was procuring suppliers for the e-Krona pilot. At the end of the year, the central bank had reviewed 11 applications to participate, eventually settling on Accenture’s proposal.