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Officially, no decision has yet been made in Sweden on whether there will be a Central Bank Digital Currency (CBDC). There is also still a lot of fog in the Scandinavian country about the exact design. Nevertheless, the reports of the Swedish central bank, the Riksbank, an insight into how things are going. In Sweden, testing the digital currency started earlier. What exactly do the reports say?
One of the interesting things mentioned in the reports is that the Riksbank does a lot of research on a digital currency that is based on a token. Token-based money is a form of digital money where the value is physically or digitally represented by a token. These tokens can then be used to make payments. Not only bills and coins are examples of tokens, but also cryptocurrencies are often referred to as tokens, where payments are all stored. Characteristic of a token is that only the means of payment in a transaction needs to be verified and that no information is necessarily required about the person paying. With many tokens, there is a high level of privacy for the users.
So, tokens are different from money stored in an account. With a token, it is possible to maintain a high degree of privacy, while with an account-based system, the data of the users is often also known. If the central bank opts for a Account-based CBDC, is a balance held in an account with a financial institution, such as a bank or a credit card company. Unlike token-based money, the value of money in an account is not stored on a physical object, but balances are managed by a financial institution. If payments are made, these payments go through the institution and one therefore relies on a third party.
The Swedish central bank is now exploring whether the e-krona can be issued as tokens, according to the report of the First test phase in Sweden. In the model of the Riksbank the central bank is the only party that issues the e-krona, but the issue is done through third parties. Therefore, this design is similar to the issuance of cash. Coins and notes are also issued by the central banks and for a long time were channelled through commercial banks, now it is Geldmaat the cash service provider.
The main task of the Riksbank is issuing digital tokens when requested. It is also up to the central bank to determine which parties act as intermediaries, One who participates, and the rules they must comply with. These intermediaries, for example commercial banks or payment services, check whether the token has been issued by the central bank and has not been used in previous transactions. If the token is valid, the banks process the transactions and new tokens can be requested or surrendered to the central bank. The network is therefore decentralised. Account holders do not have an account or wallet with the central bank, but with an intermediary who checks whether the transaction is in accordance with the legislation and then executes the transactions.
A possible example of how the tokens are issued (Source: Swedish central bank)
During a transaction with a token, a transaction is approved based on the information provided by the token. The intermediary checks whether the token has been issued by the central bank and at the same time checks whether the token has not been used before. After the transaction, new tokens are created, as a token is only used once in this model.
The Swedish central bank uses a scenario as an example in which Maria makes a payment to Johan. Let's say Maria has a wallet with a token representing 100 crowns. In this scenario, Maria wants to buy 60 crowns worth of gold from Johan, who also has a wallet, but does not yet own e-crowns. Mary, with a private key that she has the right to use the token. If the transaction is approved, two new tokens will be created. one token of Mary representing 40 more crowns and a second token of 60 crowns that is allotted to John.
Example of a transaction with the tokens (Source: Swedish central bank)
This transaction is settled by a third party, in this example Credit Suisse. In the unlikely event that this bank goes bankrupt, this will have Latest Report of the Swedish bank no consequences. In this model, the tokens are not a claim on the intermediary, but on the central bank. Such a design also means that no interest is levied on the tokens. Time will tell whether this design will actually be implemented.
It is also possible that bankruptcy does mean that people lose their money, just as people are no longer entitled to the banknotes that have been deposited with a bank if that bank has gone bankrupt. CBDCs then become a claim on the third party. However, this depends on the design of the central bank digital money, and that can vary from country to country.
According to the Riksbank CBDC's similarity to cash also depends in part on how the tokens are used. Stored. In theory, it is possible to create a cash equivalent if tokens are stored locally. With such a design, offline payments are possible and a lot of privacy can be given to the user. This often depends on the legislation. In such a scenario, digital money already looks quite similar to cash. This also means that the money is lost if the device on which the tokens are stored is lost or damaged.
If a token is stored on the third party's network, offline payments are not possible and the digital currency is already much more like a bank account. Digital money can offer more features to users in such a scenario, such as automatic transfers and an account linked to a phone number, making payments easier. Users are likely to enjoy less privacy in this scenario. So a lot depends on the design of the coin.
It is unlikely that a central bank will opt for a design that gives users a great deal of privacy. Even if there is a CBDC that is based on a token, banks will always have to check transactions for illegal practices. Central banks will not easily introduce a means of payment that loses all grip and control over the payment system. The degree of privacy with digital central bank money will therefore be about the same as the privacy we currently enjoy with a normal current account.
e-Krona network (Source: Swedish central bank)
There is a lot to do about programmability, also in the Netherlands. People are afraid that the government will interfere too much and rigorously control buying behaviour. In theory, it is possible for CBDCs to be programmed, so that they can only be spent in certain stores. The Riksbank this does not seem to be possible for the e-crowns, as can be read in the most Recent Report; 'the Riksbank's position is that any programmability on an e-krona should enable the development of efficient and user-friendly payment services, not limit or control the e-krona's areas of use'.
Thus, the Swedish central bank refers to conditional payments, but not to conditional money. Should money be programmed in such a way that it can only be spent in certain stores, it also loses the function of money and becomes more of a kind of gift card, according to the Riksbank. Also the Bank of England wants to enable programmability only if it is initiated from the users.
But what do conditional payments look like? Conditional payments will then resemble Smart Contracts, where a transaction is only executed if certain requirements are met. For example, the Riksbank An example in which a car is purchased. The transaction will only be carried out if the customer transfers the correct amount and if the car is in the customer's name. Until then, the amount the customer transfers is frozen, so to speak. Only when the car is in the customer's name does the money appear in the car dealership's account.
So there is still a lot of fog surrounding CBDC. It is still unclear whether there is actually a Digital currency and what this coin might look like. While the likely design in Sweden is now a token-based CBDC, the user won't notice much difference between a token or an account.
Nevertheless, it is interesting to follow the development of the digital currency. The ECB's digital currency will probably look different from the one in Sweden, but since Sweden started testing the e-krona earlier, it is certainly interesting to keep looking at the research in Sweden as well.
The image above this article was taken from Jernej Furman and is available under the Creative Commons 2.0 license
