Kiffmeister’s FinTech Daily Digest (06/21/2020) Special Riksbank CBDC Edition

In today’s Digest I break out the chapters in the special edition of the Sveriges Riksbank Economic Review dedicated to central bank digital currency.

The rationale for issuing e-krona in the digital era
This chapter describes the rationale for providing e-krona to the public through a partnership between the Riksbank and supervised payments service providers. This arrangement can foster competition and innovation while ensuring the fundamental security and efficiency of the monetary system. These considerations are increasingly relevant as the use of paper cash falls because commercial institutions may not have sufficient profit incentives to provide an alternative means of payment that is universally accessible. Moreover, in a digitalized economy, Big Tech firms and other multinational enterprises are increasingly likely to issue their own private currencies to facilitate their collection of valuable information about consumer behavior. Therefore, launching an e-krona would help ensure that all Swedish individuals have access to an efficient, convenient, and secure means of payment.

Competitive aspects of an e-krona
This chapter analyzes the competitive impact of introducing CBDC in Sweden, where cash use is falling rapidly. It assumes that strong network externalities characterize payment markets and that, consequently, these markets are at risk of developing into monopolies or tight oligopolies if left unregulated. It provides an overview of policy alternatives that have been used in markets that share some of these market characteristics and discusses existing procompetitive regulation. It then tries to predict the consequences for payment market competition, suggesting that there are at least five possible efficiency reasons for introducing an e-krona.

The Riksbank’s seigniorage and the e-krona
Seigniorage has historically been an important source of profits for the Riksbank. In recent years, the use of cash in Sweden has declined rapidly, and a future possibly cashless society could have important consequences for the Riksbank’s financial independence. This chapter contains a discussion and some numerical examples of how the introduction of an e-krona could affect the Riksbank’s ability to generate profits. Several factors affect the results: whether the e-krona would be regarded as a substitute for cash or bank deposits, how high the demand for the e-krona would be, and the level of the interest rate. As a final part of this article, we address the question of how high the demand for an e-krona would have to be to cover the Riksbank’s current expenses.

Is central bank currency fundamental to the monetary system?
This chapter discusses whether the ability of individuals to convert commercial bank money (i.e., bank deposits) into central bank money is fundamentally important for the monetary system. This is a significant question since the use of cash – the only form of central bank money that the public currently has access to – is declining rapidly in many countries. The question is highly relevant to the discussion around whether central banks need to issue a retail CBDC. It concludes that depositors’ need for control could be a reason why cash or a CBDC is essential, even in countries with strong measures safeguarding commercial bank money.

E-krona design models: pros, cons and trade-offs
This chapter sketches out four different design models for supplying a retail e-krona, discussing  advantages and disadvantages of each using the policy goals identified by the Riksbank for the payment market as our point of departure. The four models are (i) centralized provision without intermediaries, (ii) centralized with intermediaries, (iii) decentralized with intermediaries (iv) a synthetic e-krona. Possible trade-offs involve weighing the advantages of more minimalistic (e.g., synthetic) approaches against performance as regards enhanced competition and resilience, and the amount of decentralization versus control over data and privacy.

Central bank digital currencies, supply of bank loans and liquidity provision by central banks
This chapter suggests that central banks can offset potential adverse effects of CBDC on the supply of bank loans by accepting the loans as collateral. Central banks can also conduct an outright purchase of illiquid assets to stimulate banks’ supply of illiquid loans. As central banks buy illiquid assets from investors, new central bank reserves will be created for banks. Investors who sell their illiquid assets are then likely to rebalance their portfolios, increasing the demand for illiquid assets and reducing the cost of illiquid term funding for banks.