The adoption of a potential digital euro will not displace the Swedish krona, the Swedish central bank said .
In a staff memo published Tuesday, the Sveriges Riksbank indicated that it sees potential benefits for Sweden in the digital euro. It highlighted the possibility of creating a more robust and competitive payment system.
The bank added that there may be a slight shift away from traditional bank deposits. However, the Riksbank believes that any impact will be limited due to the proposed cap on individual digital euro holdings.
Use of the digital euro may extend beyond the eurozone. Although intended for eurozone countries, the proposal allows 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 digital euro on an equal basis with eurozone citizens.
Sweden’s central bank has downplayed the impact of a potential agreement, arguing that institutional factors will not “overtake” the crown. First, payments involving the government are made in Swedish krona, which strengthens its position as the primary currency, it said.
“For example, given that we pay taxes in Swedish kronor, we also prefer to receive our salaries in Swedish kronor,” the Riksbank reported. “And when companies pay salaries, or major expenses, in Swedish kronor, they prefer to charge customers in Swedish kronor.”
In addition, Swedes can use digital euros even if they have not previously joined the eurozone. Meanwhile, companies in Sweden can accept digital euro payments, but must transfer them directly to a bank account, just like companies in the eurozone.
EU moves forward with digital exploration of euro
Late last year, the European Central Bank (ECB) launched a two-year planning phase for the digital euro project. Its goals for the period include finalizing the rules, selecting private sector partners and conducting tests and experiments.
According to the EU’s draft proposal, which may be revised before publication, the benefits of the digital euro are notable. Meanwhile, the potential drawbacks associated with its absence could be significant. The draft legislation gives the ECB the power to limit the amount of money individuals can hold digitally. A possible limit of 3,000 to 4,000 euros is under discussion.
Sweden’s e-Krona is based on the digital euro
A potential drawback of the digital euro is that it could threaten the stability of the Swedish krona. High inflation could lead to price fluctuations. If this becomes a problem in Sweden, companies may switch to pricing in euros. People may also choose to keep more of their money in euros (seen as a more stable currency) instead of kroner. This “flight to quality” could weaken the krona.
Moreover, the decision to introduce a digital Swedish krona, or e-krona, depends on the development of the digital euro. According to the bank, the e-crown would strengthen the Swedish krona’s position in Sweden if the digital euro becomes widespread.
In addition, using the technology and regulations created for the digital euro could significantly reduce the cost and complexity of introducing the e-crown. Finally, it said that the coexistence of the two digital currencies could lead to smoother cross-border payments.
