Digital euro will not replace Swedish krona, says central bank

Adopting a possible digital euro will not displace the Swedish krona, the Swedish central bank said. In a staff memo published on Tuesday, the Sveriges Riksbank indicated that it sees benefits for Sweden in the digital euro. It highlighted the possibility of a more robust and competitive payment system.

The bank added that there may be a small shift away from traditional bank deposits. However, the Riksbank believes any impact will be limited due to the proposed limit on individual holdings of digital euros.

The use of the digital euro could extend beyond the eurozone. Although designed for eurozone countries, one proposal would allow non-eurozone members to potentially join the system through agreements with the European Central Bank (ECB). This could give residents and businesses in those countries access to the euro-based CBDC on an equal basis with those in the eurozone.

The Swedish central bank minimized the impact of a possible deal, arguing that institutional factors will not “crowd out” the krona. First, payments involving the government are made in Swedish crowns, which strengthens its position as a primary currency, she said.

“For example, since we pay our taxes in Swedish crowns, we also prefer to receive our salaries in Swedish crowns,” the Riksbank said. “And when companies pay salaries, their main expenses, in Swedish crowns, they prefer to charge customers in Swedish crowns.”

Furthermore, residents of Sweden can use digital euros even if they have never been or lived in the eurozone. Meanwhile, businesses in Sweden can accept digital euro payments, but they must transfer them directly to a bank account, just like businesses in the eurozone.

The European Central Bank (ECB) launched a two-year planning phase for the digital euro project last year. The objectives for this period include finalizing the rules, choosing private sector partners, and conducting tests and experiments.

According to the EU’s draft proposal, which may be revised before it is released, the benefits of a digital euro are significant. Meanwhile, the potential downsides of not having one can be significant. The draft gives the ECB the authority to limit how much money individuals can hold in digital form. A possible limit of between 3,000 and 4,000 euros is being discussed.

A potential disadvantage of the digital euro is that it could threaten the stability of the Swedish krona. High inflation can lead to price fluctuations. If this becomes a problem in Sweden, companies could switch to euro pricing. People could also choose to keep more of their money in euros (seen as a more stable currency) instead of crowns. This “flight to quality” could weaken the crown.

Furthermore, the decision to launch a digital Swedish krona, or e-krona, depends on the development of the digital euro. An e-krona would strengthen the position of the Swedish krona within Sweden if the digital euro is widely used, according to the bank.

Furthermore, leveraging the technology and regulations developed for the digital euro could significantly reduce the cost and complexity of launching an e-krona. Finally, the coexistence of both digital currencies could lead to smoother cross-border payments, she said.