Exploring the Innovative Potential of the E-Krona

The Riksbank has issued its phase 3 report on its work to understand how an e-krona might work ¹.

This phase investigated how the Riksbank could collaborate with existing payment service providers (PSPs) to allow access to the e-krona based on the existing collaborative approaches. The work looked at the design of participation conditions, management organisation, regulatory framework (including brand management, service offerings and interfaces) and principles for the distribution of costs and revenues.

The levels of governance can range from giving participants freedom to design services and interfaces with the public, a low level of governance, to the Riksbank defining interfaces, services and standardised offers, a high level of governance. The choices are about how to promote competition and innovation while keeping a sufficiently standardised product that the public is not confused.

Technical work

The technical work in this phase investigated and tested how programmable payments can be introduced and how well the platform being used for this pilot worked with it. It is the possibility of conditional payments that is interesting as it offers a source of innovation to make payment services more efficient and flexible.

The Riksbank thinks that programmable money, ie. money that is programmed for special purposes, loses a key property that defines what money is, namely its ability to be used for payments in all contexts. It can also be seen as an infringement of personal privacy. The Riksbank does not want to control or limit what money can be used for.

As part of the work, therefore, a practical use case was implemented in which a payment was made if, and only if, a specific condition was met. An investigation was also carried out comparing the technology with traditional account-based systems. The main questions for the investigation were whether the technology could allow: 

• The Riksbank to set certain rules for the e-krona and authorised participants, allowing the creation of services within this technical framework.

• Simpler design, development and dissemination of more advanced payment services, such as conditional payments, which do not require the Riksbank to be directly involved in their design and distance the Riksbank from information about their use.

The conclusion was the technical solution can enable the development of payment services with more advanced logic and integration with external data sources. Distributed Ledger Technology and smart contracts make it easier to see compliance with agreed regulations, but does not eliminate the need for traditional regulation, oversight and trust between different actors and users.

The task of protecting personal privacy, as well as banking secrecy, becomes more complex as there is increased data sharing between parties.

While the solution does appear to enable the development of more advanced services, more work is needed to understand how the Riksbank can maintain its current role in the payment market while letting private actors take advantage of what the new technology offers.

Project Icebreaker

The Riksbank has worked with the Bank of Israel, Norges Bank and the Bank for International Settlement (BIS) to demonstrate how cross-border payments could work using different central bank digital currencies.

This approach, that allowed a central hub to communicate with the individual CBDC networks matching end users with the best offers from Foreign Exchange (FX) providers, allowed payments between currencies in a way that could reduce risk and promote competition and speed. The model allowed the integration of CBDC networks that were built on different platforms in a way that involved few requirements and little governance over the design of each CBDC network.

The project set up a hub that worked with each country’s CBDC system. The CBDC systems could communicate with each other and match end users with the participant offering the most affordable exchange between the various currencies (FX service).

This matching also applied to end users who were already customers of a participant who was also offering an exchange but at a higher price. The FX providers were private actors, such as banks or other PSPs, who were participants in at least two CBDC systems and who could thus receive a payment from the payer in the sending CBDC system and, in parallel, make a payment in the receiving CBDC system to the recipient, a so-called PvP (payment versus payment) with two currencies.

The project used HTLC (Hash Time Lock Contract) technology, which is a form of smart contract that can lock payments and thus ensure that the payment to the FX provider in the sending CBDC network only goes through if the payment from the FX provider to the final recipient has been executed in the receiving CBDC network.