CBDCs could protect citizens from e-currency abuse, official says

Central banks need to consider issuing digital currencies or leave citizens vulnerable to market power, said a senior adviser at the Sveriges Riksbank.

Cashless societies could leave payment systems vulnerable to “increasing monopoly power … if there’s no sort of competition from central bank money”, said Hanna Armelius of the Swedish central bank.

In 2018, only 13% of Swedes reported having paid for their last purchase in cash – down from 39% in 2010. That provided strong arguments for considering a central bank digital currency, Armelius said on the sidelines of Central Banking’s recent training seminars at Windsor.  A CBDC could help the central bank maintain contact with the public rather than just becoming “the banker’s bank”.

The Swedish central bank has been working on an experimental ‘e-krona’ since 2017. It says a technical platform for e-krona payments will be developed and tested next year.

Armelius noted “there are some vulnerable groups in society that might have difficulties with digital payments”, saying this is already becoming a problem in a country that frequently no longer accepts cash.

Declining use of cash also creates worries around crisis preparedness, Armelius said. “If there’s an electricity outage and all means of payments are electronic, there might be problems. Cash has always been a really good option for those kinds of situations.”

Armelius said it was possible that a CBDC might increase the risk of bank runs. But she said that the central banks might mitigate this if their CBDC could “imitate the frictions that are around cash in digital form”. This might be done by imposing limits on daily withdrawals or fees beyond a certain withdrawal amount.

The Riksbank has said the decision on whether to issue an e-krona is a “political decision”, and so should not be made by it. It issued a petition to the Swedish parliament earlier this year to review the concept of legal tender to include CBDCs.

Armelius casts doubt on the idea that adjustments to a CBDC interest rate would not be constrained by any effective lower bound. She said: “We have always seen that the e-krona would be a compliment to cash, and if cash is around then cash will still be what forms the lower bound for the policy rate.” 

People could simply convert their CBDCs into cash and have interest rates remain at effectively zero, she said. Even if a cashless society emerges, Armelius said CBDC could be converted into other currencies or assets as a way to avoid negative interest rates.