Sweden is considering switching from its national currency, the Krona (Crown) to a digital equivalent: a stablecoin backed by the state’s fiat currency, referred to as a Central Bank Digital Currency (CBDC).
The country’s financial markets minister, Per Bolund, said the Riksbank has launched a review expected to be completed in 2022, and observed that ‘it’s crucial that the digitalized payments market functions safely, and that it’s available to everybody … depending on how a digital currency is designed and which technologies are used, it can have large consequences for the entire financial system.’
There’s no guarantee that Sweden will make this transition, or that it’s coming soon. But Sweden’s heavily cash-averse daily economy makes it a prime candidate: most transactions are by card, even on public transport or in taxis, and payments that in most countries would be handled in cash are carried out through electronic payment provider Swish. In fact, Sweden has all but abandoned the Krona already.
Add to Sweden’s near-total cashlessness a high degree of public trust, meaning a population that largely sees banking innovations like this as benevolent and convenient, and the policy’s future looks bright — particularly with the enthusiastic support of the country’s central banker, Stefan Ingves.
However, Japan has been considering the idea for some time and added it to the policy roadmap in July this year. Other nations are at varying stages of the consultation and consideration process, but the idea has moved from ‘if’ to ‘when’ globally and some nations — notably China — have already taken the leap.
How should the digital assets and financial spaces respond?
For many exchanges, trades are essential currency speculation. There’s no reason to buy one digital currency over another in order to do business in a certain location, since all are nonlocal.
Exchanges might not be strongly affected by the introduction of national digital currencies, since many likely won’t be listed on exchanges anyway. China’s DCEP (Digital Currency Electronic Payment, DC/EP) will not be listed on exchanges, and while other nation states will take a different view from China toward the legitimacy of non-state-issued digital assets, they’re not likely to want to encourage speculation in their own digital currencies, nor to want them seen in the same light as altcoins or even Bitcoin.
This could have the paradoxical effect of making it more difficult to onramp to digital asset exchanges than previously, for citizens of countries that use national digital currencies.
Trust and custody
A switch to the e-Krona would make little difference in Sweden, whose civil law code leaves little room for trust and custody arrangements. But worldwide, how would an uptick in digital currencies affect trust and custody arrangements?
In the US, we have some idea; the OCC has already permitted chartered banks to custody stablecoins provided they’re backed 1:1 by fiat currencies. That’s a long way from a fully open door for the digital assets space. But it’s probably a sign of things to come.
The majority of CBDCs under consideration are blockchain-based, but they rely on conventional accounts rather than private keys for consumer-level access. As a result, the challenges of custodying them will be somewhere in between traditional asset custody and the custody of a purely private-key-based asset like Bitcoin.
Traditional digital assets
Traditional digital assets likely won’t be strongly affected by the advent of CBDCs. They’re typically used as a store of value rather than a medium of exchange — in fact, the once-risky Bitcoin is now seen by some investors as a hedge against risk — and there’s little reason to think that will change.
What’s not clear is how easy it will be to make international transactions in CBDC, one of the major use cases for digital assets worldwide and a major draw for businesses. But we can extrapolate: central banks want to keep control and aren’t interested in anonymity, losing many of the security advantages of the blockchain for the end user in the process. As such, if a business has the choice between making a transaction in traditional digital assets and using a CBDC, even if there are no regulatory or other hurdles in the way, they are likely to plump for the most secure option.
CBDCs Vs Bitcoin
So, does this mean there’s no reason to keep BTC, ETH, BTS or any of the other traditional digital assets around now?
No, it doesn’t. BTC as a store of value won’t go away. Digital asset investment isn’t about to cease — major institutional and HNWI investors are just moving into the space.
What will happen is that digital assets will exist side-by-side with CBDCs, often serviced by parallel or partially integrated institutions. For instance, banks have always been chary of traditional digital assets. Perhaps it was because they were designed to make the extant financial system redundant; perhaps it’s because of their complex technological underpinning or their often-fluctuating prices. But banks have no such objections to CBDCs. So what’s likely to happen is that banks will offer management, custody and other services, fiduciary and otherwise, to CBDCs a lot more eagerly than to traditional digital assets; meanwhile, an infrastructure has come into being to support those assets.
CBDCs and central banks
Central banks will see major changes if CBDCs are widely introduced. But many things won’t change as precipitously as you might expect.
Most money is digital already. Outside of small-amount exchanges like buying a newspaper, cash is hardly used in modern economies. The larger the amount, the less likely it is to be in cash; imagine making a mortgage payment in bills. Between businesses, financial exchange already means amending a ledger. CBDCs will make this process more efficient and secure, but won’t affect its essential nature.
What will probably change is the weight and prestige of central banks swinging round behind digital payment tools that combine CBDCs with a mobile app, meaning you can send money from one cellphone to another in real time and securely. It’s a long way from the vision the first generation of digital assets enthusiasts shared, but it’s probably closer to what most people want. And the old digital asset exchanges will still be there.