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World’s Oldest Central Bank Reviews Possible Digital Currency With Mixed Results

[vc_row][vc_column][vc_column_text]Sweden’s Riksbank has investigated the viability of central financial institution digital currencies (CBDCs) because of its local industry and declared mixed effects.

Inside a 96-page economic review, june 18 updated, the planet’s oldest central lender presents four models for offering a digital variation of the Swedish krona (e-krona) along with outlining how well the various models would fit its coverage goals.

 

Those goals include fostering a well balanced store of value and unit of account, being truly a lender of last resort (LOLR) providing a secure method of payment and settlement and providing tools for preserving financial stability.
Amid that backdrop, the four models under review incorporate a “centralized e-krona provision without intermediaries,” “a centralized model with intermediaries,” “decentralized solutions with intermediaries” and “a synthetic e-krona.”
“We’ve seen that all models could have disadvantages and advantages, however, many seem better at fulfilling the existing needs of the Swedish payment market than others,” the review reads.
A centralized e-krona provision without intermediaries would start to see the bank take responsibility for the entire distribution chain for the e-krona. This scheme, the review says, means a fresh role for Riksbank wholly, similar to what size retail banks operate.
The Riksbank claims that under this model it could illicit substantial charges for staffing and customer care functions for potentially an incredible number of users while simultaneously acting as a competitor to private payment services at the retail level, indirectly developing a market monopoly therefore.
“Riksbank may find yourself having large a footprint in the payment market too,” the review reads. “It might also be possible to implement a small-scale version of the model where in fact the Riksbank would give a basic supply of services which could, for example, be catered to the requirements of vulnerable groups.”
The centralized model with intermediaries closely resembles the existing Swede financial infrastructure for the reason that it is predicated on a partnership between your central bank and private providers where Riksbank maintains its prominent role at the wholesale degree of the payment market. However, in this example the lender doesn’t have an operational role in the distribution chain, as stated above.
“Technology isn’t a decisive element in this model. Both the standard account-based and a token-based e-krona are possible. A token-based model is where each digital e-krona is identifiable and would &ldquo uniquely; replicate the existing cash distribution model however in digital format essentially,” the review reads. “The distinction between a token-based or account-based e-krona does not have any bearing on the potential implications of the e-krona on the monetary system alone.”
In a similar solution to the way the centralized model above operates, in a decentralized setting all intermediaries relating to the e-krona would have a very direct contractual relationship with the buyer. “This setup is merely a decentralized database of most e-kronor in circulation at any given moment, where in fact the Riksbank verifies all
transactions before completion.”
The review suggests Riksbank would have to give a contingency plan if one or several intermediaries were to fail, the lender would then have to be able to provide a large numbers of customers with e-krona payments.
This differs slightly from the centralized model where Riksbank does not have any contractual agreement with the buyer and the anti-money-laundering (AML), know-your-customer (KYC) and counter-terrorist-financing (CTF) policies will be the sole responsibility of the intermediaries.
The final model presented in the economic overview of CBDCs was the synthetic e-krona. The paper explains that apart from allowing more institutions usage of the real-time gross settlement (RTGS) systems “the model consists mostly of new legislation that could require banks (among others) to create segregated accounts.”
This model closely resembles the prevailing one, where in fact the role of the central bank is usually to be an actor in the center of the payment system with the private market acting as a second layer serving customers. For the private sector, “today without the need for additional hardware or investment existing payment solutions could continue steadily to operate as.”
“Why is the Synthetic e-krona attractive is its limited scale set alongside the other models that people have described. It could not involve major investment in infrastructure and the Riksbank could renounce all responsibility for KYC, ALM etc,” the lender states.
The Riksbank concludes that both centralized and decentralized model featuring intermediaries, along with the centralized e-krona provision without intermediaries, would incur substantial cost and change. A synthetic digital version of the Swedish krona, the paper says, could end up being viable but might not classify as a CBDC even.
“This type of minimalistic approach may not achieve the goals of enhanced competition and resilience to exactly the same extent since it will be quite much like today’s system,” the review reads. “Furthermore, it could not be considered a direct claim on the Riksbank, and for that reason it isn’t clear if this should be looked at to be always a CBDC really.”
The central bank added that the majority of the modelling would have to be expanded upon in “many dimensions” in future studies.

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