functioning of the payment market even in times of crisis and war should be the various tools could affect the Riksbank’s balance sheet and allocation
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1 Petition to the R iksdag 2018/19:RB3 on the payment market Summary Cash use has decreased rapidly in Sweden and a scenario within the not – too – distant future, in which cash is irrelevant due to the trade sector no longer accepting it as payment, cannot be ruled out. Even if cash does not completely disappear, a situation in which cash is no longer generally accepted as a means of payment would be tantamount to a cashless society. The Riksbank has expressed concern over this development in a consultation response to the Riksbank inquiry. 1 Sweden is one of the countries in the world in which cash has become most marginalised, but the technological shift caused by digitalisation is affecting all countries. Digital central bank money or a central bank digital currency (CBDC) is therefore something that is being investigated by the majority of central banks around the world. Many have also started pilot studies and tests to learn more about how a CBDC might work in practice. For 350 years, Swedish society has re lied on the Riksbank to provide the krona. In addition, banknotes and coins issued by the Riksbank have been legal tender since the 1850s. Technological development and the digitalisa tion of market to a head as this development, if nothing is done, will in all likelihood lead to the general public no longer having access to generall y accepted central bank money. In turn, this effect may make it more difficult for the Riksbank to promote a safe and efficient payment system in Sweden, not just in times of crisis and war but also in peacetime. A committee should therefore be tasked with performing a review of the con 1 In short, the Riksbank takes the view that all banks with payment accou nts shall offer cash urgency. For example, it needs to be clear which services, in addition to public medical care, shall be obliged to accept cash. For further info rmation, see https://www.riksbank.se/globalassets/media/remisser/riksbankens – remissvar/svenska/2018/yttrande – over – remiss – om – tryggad – tillgang – till – kontanter.pdf .
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S UMMARY 2 2018/19:RB3 digitalised economy and the role and responsibility of both the state and the private sector on the payment market. The committee should have all – round expertise covering areas su ch as the law, economics, political science, history and EU issues. A good example of such a committee of experts is the EMU inquiry of the 1990s which provided emit should prescribe a broad conceptual approach. Furthermore, the committee should perform a comprehensive analysis of different feasible solutions to problems and risks. As part of this work, the committee should examine both the need for new regulation s for the private sector and the implications of introducing a CBDC. Finally, the smooth functioning of the payment market even in times of crisis and war should be – point. The committee should furthermore assess and propose the le gislative amendments that it considers necessary for Sweden to continue to have a stable and efficient payment market. The committee should also consider the need for any legal amendments as regards, for example, the concept of legal tender. As time is of the essence regarding this issue, the time frame for the assignment should not be too long.
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T ABLE OF CONTENTS 3 2018/19:RB3 Table of contents Summary .. .. .. 1 Proposal for decision by the Riksdag .. 4 The payment market in a digital economy summary .. 5 Background .. .. .. .. 5 What is money? .. .. .. 5 Different types of money .. .. .. 8 9 Central bank money as legal tender .. . 11 The need for a review .. .. . 12 Proposal for .. . 12 Other issues .. .. 13 Impact assessments .. .. 13 Delimitations .. .. . 14 Consultation/Implementation of the assignment .. 14 .. 15 market a historical description .. .. . 15 Defining the problem How can confidence in money, resilience and competition on the payment market be maintained in the digital era? .. .. .. 20 The Swedish payment market today .. 25 Tools of the state, including the e – krona .. 28 International work on a central bank digital currency 34 Annex 2: Consultation response The Riksbank’s e – krona project, rep ort 2 .. .. .. . 37
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P ROPOSAL FOR DECISION BY THE R IKSDAG 4 2018/19:RB3 Proposal for decision by the Riksdag regarding an inquiry into the payment market in a cashless digital economy and the roles of central government and the private sector in such a market. Stockholm, 16 April 2019 On behalf of the Executive Board STEFAN INGVES /Emelie Nilsson Stefan Ingves, Kerstin af Jochnick, Per Jansson, Cecilia Skingsley, Martin Flodén and Henry Ohlsson took part in this decision. The rapporteur was Gabriela Guibourg.
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T HE PAYMENT MARKET IN A DIGITAL ECONOMY SUMMARY 5 2018/19:RB3 The payment market in a digital economy summary Background Cash usage is co ntinuing to decline in Sweden and more and more business operators are refusing to accept cash. The Riksbank Committee has compiled a number of proposals aimed at securing access to cash throughout the entire country. However, this development is largely b eing driven by a fundamental technological shift and changed consumption patterns and will probably continue. Sweden could thus be moving towards being a cashless society. This does not mean that cash will disappear. Instead, cashless is defined as a situa tion in which cash is used and is accepted to such a limited extent that, in principle, it has ceased to function as a means of payment. When this happens, There follows a summary of the in – depth analyses presented in Annex 1 that address the basic conditions and issues relevant to the submission. What is money? Economic aspects Money is a precondition for a functioning economy and is thus a central part imately a social convention based on the agreement by every member of a society to define something as money. Just what is defined as money has varied over time and taken different forms in different regions. The technology used to produce money and the ma terial of which it consists has also changed throughout the ages. Above all, a historical trend towards the dematerialisation of money can be discerned: from coins of precious metal to paper money and now digital money. Historical changes in the design of money show that the actual form plays a subservient role. Instead, the most important thing is confidence that the object defined as money will be accepted as money. Confidence in money cannot be taken for granted and is based on money fulfilling three imp ortant functions. It must function as a unit of account that makes it possible to express all prices using a standardised measure. It must be a good store of value , which is to say that the value of money must remain stable over time. In addition, all part ies must accept it in exchange for goods or services, which is to say money must act as a means of payment . defence and justice system. Central government has long had overall responsibility for providing this. To maintain confidence in money, central governments around the world have de legated certain core tasks to the central
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T HE PAYMENT MARKET IN A DIGITAL ECONOMY SUMMARY 6 2018/19:RB3 banks, such as issuing money in standardised formats, keeping the value of money stable through monetary policy and ensuring that the payment system functions in a secure and efficient manner. Legal aspects In acc ordance with the above, money is usually defined with the assistance of three different functions that must be present if something is to be defined as money: unit of account , store of value and means of payment . In some respects, t hese f unctions have been reflected in Swedish legislation to create substance and confidence in the concept of money. As regards firstly the function unit of account , this is mentioned in Chapter 5, Section 1, third paragraph of the Sveriges Riksbank Act (1988:1385), which speci fies that the monetary unit in Sweden is called the krona and that the krona is divided into 100 öre. For money to act as a unit of account, it must also simultaneously be a measure of value. However, even though the value of money is the fundamental condi tion for the national economy to function, no actual measure of value for the krona is directly legislated, unlike its physical dimensions. Length and weight are regulated through what is known as the SI system in an EU directive that ultimately specifies physical references. Time indication in Sweden is regulated by the Ordinance on Swedish standard time (1979:988), which refers to Coordinated Universal Time (UTC) as determined by the International Time Bureau, which itself can be said to have an astronomi cal basis. Unlike these measurements, the Swedish monetary unit lacks a direct legal connection to anything that can be physically defined. From time to time, Sweden has had a metal standard; as recently as the 1930s, we had a gold standard. In addition, t he krona was tied to the pound sterling for a time in the 1930s and again, after the Second World War, to the US dollar, which , in turn, was abandoned in 1971, the Swedish krona was tied to various baskets of foreign currency. Since 1992, the Swedish monetary unit has lacked a link to either metal or foreign currencies. Despite this, it is able to function as a unit of account. Even if the krona is not tied to any underlying asset, it can, through the Riksba consumer price index with a fixed interest rate, the CPIF, which is based on a representative basket of selected goods weighted in relation to their value share of total private domestic con sumption. However, there is no statute linking the krona to the CPIF. The relationship between the krona and the CPIF has been created by a decision by the Riksbank in which the bank interprets the provision of the Sveriges Riksbank Act that says that the objective for the 2, second paragraph, Sveriges Riksbank Act). function store of value could be said to have a certain connection to the unit of account, but, when it comes to storing value, the quality and value stability of
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T HE PAYMENT MARKET IN A DIGITAL ECONOMY SUMMARY 8 2018/19:RB3 regulations, currently seem to have a st rong position on the payment market. As mentioned above, one such convention is that a payment recipient, under the main rule, must accept private bank money as payment for a debt in the absence of a specific agreement to the contrary. Nonetheless, there m ay be reason to consider the legal regulation of these conventions and their takes place via banknotes and coins, as well as in electronic form. Considering ion as liquidity provider, both in times of crisis and in normal times, this activity must be considered to be the anchor of the Swedish payment system. Different types of money Since antiquity, central governments have played an important role in issuing money. Even today, central governments play a fundamental role in the monetary system by providing cash to the general public and reserves to the banking system and in the preservation of the function of money. Both cash, which is available to the gene ral public, and the bank reserves, which are available to the banks, are therefore jointly known as central bank money. However, this is not the only money existing in the economy. Throughout history, the banks have also complemented the role of the centra l bank by providing private money, primarily as a means of payment consisting of deposits in bank accounts. It is therefore possible to talk about a division of labour in the economy between government central bank money and private bank money. There is, h owever, an important difference between central bank money and private bank money. Central bank money is issued by, and forms a claim on, the central bank, that is ultimately the central government, while private bank money is a claim on the banks, which a re private companies. Central banks can always create money and can, by definition, not become bankrupt, while the banks can and actually do sometimes go bankrupt. However, central government has tools to make private bank money safer for the general publi c: bank regulations that make the banks more secure and amount (corresponding to EUR 100,000 in Sweden and the rest of the EU). The deposit guarantee was introduced to maintain con fidence in deposits. Following the financial crisis of 2007 2008, the regulations for the financial sector were tightened, but historically it has turned out to be very difficult to eliminate the risk of financial crises completely . Consequently, it cannot be ruled out that financial crises or other crisis situations may arise in the future. In a cashless society, such a financial crisis could arise in a situation where only private money exists. As yet, such a system has never been attempted in Sweden or a broad. It cannot be ruled out that a situation with insufficient confidence in the banking sector could lead to insufficient confidence in the
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T HE PAYMENT MARKET IN A DIGITAL ECONOMY SUMMAR Y 9 2018/19:RB3 entire monetary system. This could considerably exacerbate the effects of a financial crisis. In a cashless soci ety, a restricted group of financial corporations has access to risk – free central bank money. The general public, in contrast, does not. Consequently, it is ultimately a political issue whether central government should only offer the security provided by access to central bank money to a restricted group of financial corporations or whether the general public should also have this. Another way of formulating the question would be to ask to which extent the current arrangement should continue to apply even after the technology has changed. The Swedish state has played a central role on the payment market for over 350 years, among other things by ensuring that the general public, via the Riksbank, has had access to state money cash. In the 19th century, private banks were also allowed to issue banknotes. The relationship between these private banknotes and the banknotes issued by the central bank was not entirely clear, either in Sweden or abroad. Mo st countries decided, at various points in time, to give their central banks the sole right to issue banknotes, known as a banknote monopoly. The reasons for this varied, depending on the national and historical context. In Sweden, the question of a bankn ote monopoly for the Riksbank was was the matter of profits deriving from the issue of banknotes. Should these nt inquiries were conducted to investigate the matter, before a final decision was taken in 1897 to grant the Riksbank the sole right to issue banknotes. The most comprehensive of these, whose considerations formed the practical basis of the final decision , was the committee of inquiry of 1881. 2 main reasons for a banknote monopoly were: 1) banknotes should be entirely free of risk, 2) banknotes must be issued without a short – term profit motive, and 3) revenues from the issue of banknote s are necessary to fund a central motive. 3 Since then, the role of cash in the economy has been marginalised, while money in the form of deposits in private banks has grown i n significance. As mentioned above, most of the money used today by the general public, for 2 1904) in Sveriges Riksbank 1668 1924: Bankens tillkomst och verksamhet (Sveriges Riksbank 1668 Stockholm, p. 204 3 See Bankkommitténs underdåniga förslag till förändrad organisation af bankanstaltern a (Special Committee on Banking Proposed Changes in Bank Organisation), 1883, Stockholm: P. A. Norstedt & Söner. pp. 235 – 237.
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T HE PAYMENT MARKET IN A DIGITAL ECONOMY SUMMARY 10 2018/19:RB3 example via card payments, is therefore private bank money rather than government money. The division of labour we have had since central banks were set up, involvi ng the coexistence of central bank money and private bank money, has turned out to have worked well historically. As cash is presently the only form of state money available to the general public, a cashless society would entail the end of this coexistence . One way of continuing to give the general public the possibility of continuing to use entirely risk – free money in a digital future would be to allow the Riksbank to issue a central bank digital currency or e – krona. With an e – krona, the distribution of pr ivate bank money and state money would become more like it is in other countries or like it was in Sweden before cash usage started to decline significantly. It could therefore be said that the e – krona would be a modern form of dematerialised state money. A close parallel is the dematerialisation of securities that took place in the 1980s: a transition took place then from securities in the form of physical documents to a system in which ownership of securities was registered in digital form with no physica l documentation. 4 The question of the dematerialisation of banknotes could be said to have been postponed by about 30 years in relation to the dematerialisation of securities, which has already taken place. Alongside its role as the issuer of state legal tender, central government also plays other roles on the payment market, both as supplier of basic infrastructure for payments and as consumer of payments. On the infrastructure side, the Riksbank provides the central payment system RIX for settlement of p ayments between financial institutions in central bank money. The central government also has major incoming and outgoing payments of tax receipts and social insurance and is thus also a frequent user of the payment system. However, the infrastructure for payments is now also undergoing a rapid transformation due to both the digitalisation and the internationalisation of the market. One substantial trend is to search for economies of scale through the creation of major, cross – border platforms. For example, the European Central Bank (ECB) has created a joint European platform, TARGET Instant Payment Settlement (TIPS) for what are known as instant payments. It is also possible to make payments via TIPS in currencies other than euros, which means that Sweden m ust take a stance on whether or not it will be possible to make payments in Swedish kronor via TIPS. 5 On one hand, the trend towards larger international solutions is positive, as economies of scale allow the costs of payments to be cut, at the same time as it contributes towards financial integration across borders. However, at the same time, these cross – bo rder platforms also involve potentially systemically important parts of the financial 4 See Government Bill 1987/88:108 on an account – based system for the registration of equities etc. and Government Bill 1988/89:1 52 on an account – based equity system. 5 The Nordic banks are also investigating the creation of a new Nordic payment infrastructure, to be called P27.
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T HE PAYMENT MARKET IN A DIGITAL ECONOMY SUMMARY 11 2018/19:RB3 war or other crises. This therefore requires a trade – off to be made between the potential advantages entailed by these changes and the potentially negative effects from the perspective of security and preparedness. An e – krona designed to take the preparedness aspects into acco unt could therefore be one way of ensuring that there will continue to be an infrastructure for payments within Central bank money as legal tender Both in Sweden and abroad, it has been considered important to give cent ral bank money special legal protection as legal tender. In Sweden too, banknotes and coins issued by the Riksbank are legal tender. In legal terms, this means that it must be possible to use them anywhere in the country. However, freedom of contract makes it simple to get round this, for example by retailers displaying signs saying that cash cannot be accepted. The protection granted by the legislation covering legal tender in Sweden is relatively weak from an international perspective. 6 For example, in No rway and Denmark, there exists consumer legislation restricting the possibility of waiving the obligation to accept cash. If cash were to be marginalised as a means of payment, the current legislation would mean that Sweden would have no legal tender. Ther e may therefore be reason to review the possibility of making the legislation technically neutral so that electronic means of payment issued by the Riksbank can also become legal tender. 6 Compare, however, with Section 3, first paragraph of the Consumer Contracts Act (1994:1512), which mean s that contractual conditions that are unreasonable can be modified or set aside.
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