We just moved one step closer to seeing Europe’s first general-use central bank digital currency, which could be implemented as soon as 2021.

Sweden’s central bank, the Riksbank, has published an action plan for the next stage of the ‘e-Krona’ project. The e-Krona would be an electronic means of payment for use by households and businesses, to exist alongside physical cash.

Although the Riksbank hasn’t yet decided whether to issue an e-krona, it’s published two lengthy reports exploring the potential benefits, which include making the payments system more resilient, promoting competition in the payments market and improving financial inclusion.

The Riksbank cites Positive Money’s 2016 paper, ‘Digital Cash’, which makes the argument that the provision of universal accounts at the central bank could pave the way for a new form of quantitative easing via the transfer of new money directly to households.

Sweden is the country in which cash use has declined fastest, and the central bank is worried about the consequences if cash stops being a widely-accepted means of exchange. Consumers and businesses would be left totally reliant on ‘private’ bank money.

As we’ve previously pointed out, leaving the payments system in the hands of a handful of big banks and card companies puts the economy at a huge risk when those institutions experience a technological or financial failure. It also excludes those who, for a variety of reasons, prefer not to rely on a big bank to manage their money. Almost all financial institutions, including non-banks such as credit unions, currently rely on the big banks to store customers’ funds and facilitate transactions.

A central bank digital currency would offer people a means of storing money and making payments in risk-free, state-guaranteed money, with no need for an account at a private bank.

If implemented, e-Krona could operate under two systems: a value-based one and a register-based one. The latter version would have digital currency balances stored in accounts on a central database, while a value-based e-Krona would be stored separately on “deposited currency accounts”.

The Riksbank hasn’t yet determined whether to issue an e‐krona or not, but is planning a pilot to commence in 2019, with the option of implementing an e-krona in 2021 if it decides to go ahead with the project. In the meantime, it is also consulting with stakeholder groups, testing different technological solutions and preparing necessary legislative amendments.

Unfortunately, the Bank of England is behind the curve, with Governor Mark Carney declaring that although he is open-minded about the idea of a central bank digital currency, the Bank of England won’t be issuing one any time soon.

Although the Bank has published research suggesting that a central bank digital currency could have certain advantages such as improving the effectiveness of monetary policy, it has also warned about the danger to commercial banks’ business models. By allowing money to flow freely between retail banks and central bank digital currency accounts, the risk of a bank run could increase. A separate paper warns, “Banks may be subject to an outflow of retail deposits, in particular in a scenario of financial stress.”

It’s worth noting that the Riksbank believes that such a threat could be largely avoided. Its new report argues that ‘the Riksbank has tools to cope with such situations if they risk jeopardising financial stability’, just as it does with conversion of retail deposits into physical cash. This includes providing banks with additional credit via its various monetary policy tools.

We’re calling on the UK Government to work with the Bank of England to accelerate its own research into issuing a digital currency, so that we’re not left behind as other countries reap the benefits of a safe and secure public payments system.