Kiffmeister’s #Fintech Daily Digest (12/11/2020)

Sweden Explores Moving to a Digital Currency

Sweden’s government launched an inquiry that will explore the feasibility of the Riksbank issuing an e-kronor central bank digital currency, and review the meaning of the concept of legal tender. More broadly, the inquiry’s assignment includes mapping what the payment market looks like and may look like in the future, based on developments in Sweden and in other countries. In that regard, it will map the division of roles between the state and the business community in the payment market and take a position on the state’s future role. The inquiry is expected to be completed by the end of November in 2022.  

Safe Payments

This Bank of Canada paper asks, as the economy becomes increasingly cashless, can we rely on the private sector to invest in the optimal level of safety in the electronic payment system? It tries to answer this question by modelling private incentives to invest in safety in a deposit-based payment system. Depositors can mitigate the risk in the system through monitoring to reduce the risk of default before it happens (ex ante) or through monitoring for timely detection of defaults after they’ve occurred (ex post). In addition, they can also set up a separate, safe account as a backup to receive funds from the risky account in a crisis situation. The paper finds that because depositors do not internalize the externalities in the payment system, the private sector can over- or under-adopt the use of safe accounts. However, governments could use taxes or subsidies to correct private incentives and restore the optimal adoption of safe accounts.