## EXECUTIVE SUMMARY

## Source details

**Canonical URL:** [EXECUTIVE SUMMARY](https://www.imf.org/-/media/files/publications/cr/2023/english/1sweea2023004.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/cr/2023/english/1sweea2023004.pdf.md)
- [Structured JSON version](/-/media/files/publications/cr/2023/english/1sweea2023004.pdf.json)

---

### INTRODUCTION
- Sweden characterized by high adoption of digital services in the financial sector and ongoing analysis on issuance of a Central Bank Digital Currency (CBDC, e-krona).
- Riksbank one of the pioneers in exploring retail CBDC; project started in 2017 with published reports and technical experimentations.
- Government inquiry on the means of payments ongoing as of December 2022; expected to inform authorities by end-March, 2023.
- Fintech sector: about 450 active firms offering payments, credit, technical infrastructure, and wealth management.

### CENTRAL BANK DIGITAL CURRENCY (e-krona) — Systemic Risks and Riksbank Response
- Main categories of systemic risk from e-krona issuance:
  - Financial risks (depend on usage and demand):
    - Risks depend on whether e-krona is used for transaction purposes or also as a store of value, and on whether demand is only domestic or also foreign.
    - Possibility of bank runs and structural outflow of deposits from the banking system (a slow run).
    - Banks could respond by increasing remuneration of deposits, limiting deposit outflow.
    - Extent of disintermediation will affect monetary policy implementation and transmission.
    - Foreign demand for e-krona could increase gross capital flows, potentially making them more volatile, resulting in a more volatile exchange rate, increasing financial vulnerabilities, and challenging monetary policy.
    - Many risks depend on design features of the e-krona, which are yet undecided.
  - Operational and reputational risks:
    - Operational risks include data privacy, integrity, and cyber risks arising from complexity and novelty for a central bank.
    - Lower-than-expected demand for e-krona could lead to reputational risks for the Riksbank, especially if implementation costs are high.

- Riksbank actions and capacity:
  - Riksbank has published several reports and in-depth analyses; contributed to international working groups; dedicated resources to testing technical e-krona solutions.
  - Set up 19 internal workstreams to analyze and propose design solutions for the operational model of the e-krona, and to identify and mitigate financial and operational risks. Workstreams staffed by full- and part-time resources from several functional departments.
  - Riksbank committed to an e-krona design that fulfills the “do no harm” principle: support public policy objectives and do not impede the central bank’s ability to carry out its mandate.
  - Recommendations stress extensive analysis of design features, incentives for adoption, financial safeguards, and impacts on the financial system and monetary policy; continue technical testing to build a stable and resilient ecosystem, especially against cyber risk; preparatory work on legal and regulatory frameworks; increase dedicated staff and collaboration across Riksbank departments and other authorities.

- Payment landscape context and usage statistics:
  - More than 90 percent of respondents to the Riksbank survey in 2020 indicated they have access to a bank card for payments connected to their bank account, and to online banking.
  - On average, only 50 percent of users commonly used cash for transactions in 2020, down from 92 percent in 2012.
  - Swish adoption and use:
    - 75 percent of survey respondents say they commonly used Swish in the last month more than they used cash.
    - In May 2022, there were 8.6 million users of Swish, of which 8.3 million were private accounts, and 319,000 businesses were offering payments via Swish.
    - The average number of Swish transactions per customer in May was 9.7, an increase of 23 percent compared to the previous year.
    - The average value of transaction in the same period was SEK 481 (around US$48).
    - The Swedish population in 2020 was 10.4 million.
  - Payment infrastructure developments:
    - RIX-INST system launched in May to provide settlement of instant payments in central bank money.
    - Major Nordic banks working on joint Nordic infrastructure for payments.

### FINANCIAL RISK SCENARIOS FOR e-krona (USE × SOURCE)
- Key distinctions:
  - Demand source: Domestic = Swedish residents or foreigners while within Swedish borders; Foreign = foreigners not present in Swedish territory.
  - Use: Means of payment; Store of value.
- Main domestic financial risk scenarios (closed-economy framing):
  - Large e-krona demand for store of value in normal times: Fast → Bank run; Slow → Disintermediation of banks (structural replacement of deposits).
  - E-krona demand for store of value in crisis times: enables systemic bank runs or runs from other riskier asset classes.
  - E-krona demand purely as a means of payment: increased competition erodes banks’ and PSPs’ profits, potentially increasing vulnerabilities.
  - If e-krona only substitutes cash, impact on the financial system would be minimal and mainly a change in the central bank’s balance sheet composition.
- Riksbank preliminary calculation on demand:
  - A demand for e-krona of about 1 percent to 3 percent of Swedish GDP would satisfy transactions and store-of-value needs (per Riksbank preliminary calculations).
- Risks from foreign demand (if access granted to foreigners):
  - Currency and financial substitution abroad; large and volatile capital inflows; effects on exchange rate and hedging costs; effects on Riksbank balance sheet and increased vulnerabilities.

### RISKS OF DISINTERMEDIATION AND MONETARY POLICY IMPLICATIONS
- If deposits are disintermediated:
  - Banks may need alternative funding or shrink balance sheets, with negative consequences for financial stability and credit provision.
  - Substituting deposits increases banks’ funding costs; effects on lending rates depend on banks’ market power.
  - Lower profitability reduces capital generation capacity; higher loan rates could lower loan demand and lead to adverse selection toward riskier borrowers.
  - Banks could allow balance sheets to shrink, potentially causing tensions if asset liquidation is needed for redemptions.
- Banks’ strategic responses:
  - Raise remuneration on deposits to limit outflows, reducing the liquidity premium of deposits and increasing funding costs and profitability pressures.
- Monetary policy implications:
  - Disintermediation can affect monetary policy stance, implementation, and transmission.
  - Transition effects could include banks using central bank reserves, upward pressure on short-term money market rates, and a need for the Riksbank to offer additional liquidity (subject to availability of high-quality collateral).
  - Longer term, Riksbank balance sheet might increase if e-krona demand is substantial, increasing seigniorage for an unremunerated e-krona and the central bank’s footprint.
  - Effects on transmission depend on remuneration: unremunerated e-krona has minor effects in normal conditions absent significant disintermediation; a remunerated e-krona could reinforce the interest rate channel.
- Very long run:
  - E-krona could lead to a narrow banking system (separating provision of liquid assets from long-term loans). Welfare implications of narrow versus fractional banking are unclear.

### DOMESTIC RUN RISKS — ILLUSTRATIVE HISTORICAL EPISODE
- SNDO (Riksgälden) in late 2008:
  - Between August and October 2008: amounts at SNDO increased by around SEK 17 billion, a 60-percent increase.
  - Deposits of households in monetary and financial institutions decreased by SEK 14 billion in the same period.
  - SNDO deposits at peak represented about 5 percent of all household deposits in banks.
  - SNDO accounts were discontinued in 2015.
- Availability of a digitally accessible risk-free and very liquid asset (e-krona) would likely increase incentives to transfer from bank deposits, especially in times of financial-system confidence strains.

### ROLE OF DEPOSIT INSURANCE
- Deposit insurance in Sweden:
  - Commercial bank deposits are insured up to SEK 1,050,000 per institution, per person.
  - Covered deposits amounted to SEK 2,000 billion at the end of 2021.
  - Overnight and term deposits by households and nonfinancial corporations were around SEK 4,000 billion.
  - Covered deposits were about half of total deposits by households and nonfinancial corporations at end-2021.
- Wholesale and uninsured deposit risks remain relevant; wholesale investors not covered by insurance could also move to e-krona in crises.

### OPERATIONAL AND REPUTATIONAL RISKS FOR THE RIKSBANK
- Operational risk spectrum and examples:
  - Treatment of personal data: GDPR constraints; failures could cause breaches and legal/reputational consequences.
  - Resilience to cyber-attacks: risk of theft of e-krona or damage to payments system; continuous attacks could cause operational stops.
  - Integrity: AML/CFT compliance required; failures create operational risks.
  - Outsourcing to third-party providers: cost-effective but a source of operational risk if safeguards and monitoring are inadequate.
- Reputational risks:
  - Cost effectiveness: implementation, maintenance, upgrades, and staff costs could raise public scrutiny if high relative to benefits.
  - Lower-than-expected demand: could lead to calls for explanations after high development costs.
  - Sustainability: energy resources and environmental footprint could create reputational issues.

### RIKSBANK ACTIVITY AND MITIGATION EFFORTS
- Project history and staffing:
  - Project started in 2017; interim report and subsequent reports published; e-krona pilot division established in February 2019 with 11 Riksbank staff members.
  - Pilot focused on blockchain technology, but no final technology decision made.
  - Since 2022, 19 workstreams set up, staffed with around 40 Riksbank staff members from all functions; coordination group established.
- External engagement:
  - "Request for Information" issued in April to gather proposals for technical solutions; customized tests planned.
  - Forum with banks, Fintech, retail firms, and universities established; user studies planned.
  - Riksbank contributes expertise to Government Inquiry via an advisory group; one expert appointed by the government.

### RIKSBANK WORKSTREAMS (SELECTED)
- Workstream 1. Emergency preparedness — define requirements for preparedness, continuity, and resilience.
- Workstream 2. Data Privacy — GDPR implications for personal data storage and handling.
- Workstream 3. Operational Services — service levels, support and staffing.
- Workstream 4. System & Application Management — governance to ensure functionality and robustness.
- Workstream 5. Protective Security — protect information and activities of national importance.
- Workstream 6. IT and Cyber Security — resistance to cyber attacks and counterfeiting.
- Workstream 7. System availability — requirements around availability.

### TECHNICAL, LEGAL, AND DESIGN REQUIREMENTS
- Key technical and design requirements:
  - Performance: scalable system meeting highest volume and throughput requirements at a justifiable cost.
  - Architecture: satisfy security, functionality, accessibility, performance, flexibility, and scalability; allow long-term development.
  - Offline: explore feasibility and risk allocation for offline functionality.
  - Information Security: define and enforce requirements.
  - Product Features and Functional Services: define services, features and product functions.
- Legal, regulatory, and sustainability:
  - Conformance with national and international regulatory standards; review legislation and suggest changes as needed.
  - Define requirements consistent with Riksbank’s Sustainability strategy.
- Identity, governance, and distribution:
  - Define guidelines for identity schemes; governance and scheme definitions; explore wholesale implications and intermediated distribution model (two-tiered, roles of banks and PSPs undecided).
  - Workstream 15 analyzing private-public collaboration and need for clear regulation and supervision of intermediaries.
- Cross-border and international collaboration:
  - Explore enhancement of cross-border payments; Riksbank contributes to several international working groups and G7 public policy principles (2021); collaboration with multiple central banks and BIS with three reports published so far.

### RISK ANALYSIS AND MITIGATION MEASURES
- “Do no harm” commitment: Riksbank committed to a design that supports public policy objectives and does not impede the central bank’s mandate.
- Financial safeguards under consideration:
  - Unremunerated e-krona: being considered; legal constraints motivate no-interest-bearing design; will limit incentives to hold e-krona but has implications for financial stability and could reinforce the zero lower bound in monetary policy.
  - Fees and quantitative restrictions: evaluating possibility of fees and/or quantitative restrictions on holdings, potentially differentiated by user type.
  - Demand-control tools: price incentives (fees or penalty rates) and hard limits on holdings; sweeping deposit accounts could be used so settlement of payments is ensured when maximum holdings reached.
  - Calibration challenges: fees and limits require careful calibration; too restrictive limits or too high fees will stifle demand.
  - Crisis scenarios: fees or limits alone may be insufficient in widespread crisis of confidence; a mix of fiscal and monetary measures likely needed.
- Empirical and experimental approach recommended: lab settings, restricted trials, empirical analyses; consider measures that depend on rate of aggregate deposit outflows and monitor bank balance sheets and e-krona demand.
- Operational resilience:
  - Intermediated model does not shield Riksbank from operational risks; Riksbank likely core owner of infrastructure and supervisor of intermediaries.
  - Workstream 15 analyzing AML/CFT implications; intermediaries would onboard and perform AML/CFT checks.
  - Technology testing needed for systemic stability and cyber resilience.
  - PFMI recommended as guiding principles for building the ecosystem.

### ADOPTION, INCENTIVES, AND INSTITUTIONAL CAPACITY
- Adoption and incentive issues:
  - Low adoption risk in Sweden given widespread alternative digital payment methods; potential low use among the elderly.
  - Incentives for intermediaries and merchants need analysis; allowing private intermediaries to build services on top of e-krona could increase incentives to join.
  - Workstream 11 focuses on product features to limit low demand; Workstream 10 focuses on sustainability.
- Institutional capacity:
  - Riksbank reorganized to support e-krona work; pilot division renamed e-krona division under Payments Department.
  - Increased dedicated resources necessary if project proceeds—especially for analysis of financial safeguards, economic impacts, private-public collaboration models, legal and regulatory groundwork, and technological testing.
  - Comparative note: People’s Bank of China has about 300 staff engaged in CBDC-related projects; CBDC projects are resource-intensive with fixed costs largely independent of scale.
- Assessment summary:
  - Riksbank has recognized and transparently communicated risks; breadth and depth of analysis commendable.
  - Ongoing work: no firm design choices yet; workstreams in early stages.
  - Areas needing extensive further analysis: technical and analytical work, comprehensive testing of designs, financial safeguards design and calibration, empirical testing of user incentives, impact on payments market structure, resilience and PFMI alignment, legal and regulatory groundwork.

### FINTECH — CURRENT POSITION, RISKS, AND SUPERVISORY RECOMMENDATIONS
- Definition and scope:
  - Uses the Financial Stability Board working definition of Fintech.
  - Review focused on Fintech firms (excluding Fintech use by incumbent regulated institutions).
- Fintech landscape and growth:
  - Tillväxtanalys identified about 450 Fintech companies operating in Sweden in 2019.
  - Number of employees in Fintech increased from just over 340 in 2000 to almost 9,750 in 2018; median growth about 20 percent per year.
  - Growth steady over 18 years, plateau in last 2 years due to consolidation.
  - Primary activity areas: payments, credit provision, and infrastructure.
- Sample analysis (51 firms, 2020 values; monetary values in SEK millions):
  - Assets: Mean 5800; Median 23; 25 percent 4.4; 75 percent 233.
  - Equity: Mean 414; Median 14; 25 percent 2.2; 75 percent 39.
  - Employees: Mean 109; Median 12; 25 percent 4; 75 percent 30.
  - Liabilities: Mean 5340; Median 5.4; 25 percent 1.2; 75 percent 112.
  - Liabilities/Equity: Mean 6.9; Median 1.1; 25 percent 0.4; 75 percent 3.3.
  - Liabilities/Assets: Mean 0.5; Median 0.51; 25 percent 0.26; 75 percent 0.76.
  - Liabilities toward credit institutions: Mean 68; Median 0; 25 percent 0; 75 percent 0.5.
  - Operating profits/losses: Mean 26; Median -1.0; 25 percent -19.6; 75 percent 4.0.
  - Median firm characteristics: SEK 23 million in total assets; 12 employees; SEK 14 million in equity; operating loss of SEK 1 million (median).
- Interconnectedness and leverage:
  - Total liabilities toward credit institutions around SEK 3.5 billion for the sample, about 70 percent attributable to a large single company.
  - About 75 percent of sampled firms had zero or very limited liabilities toward banks.
  - Median liabilities/equity ratio about 1.1.
  - 10 percent of firms have liabilities/equity ratio of at least 15.
- VASP sector and ML/TF:
  - Number of registered VASPs increased from 3 in 2018 to 9 in 2022.
  - Sector balance sheet SEK 193 million (US$19.3 million) and remains insignificant compared to the banking sector.
  - About half of the VASPs engage in cross-border transactions.
  - FI rates VASPs as “very significant” for ML/TF risk but lacks entity-level ML/TF risk differentiation; all VASPs rated medium-risk since 2017.
  - Supervisory activity: little supervision since 2015; supervisory activities resumed in 2021 with two out of nine VASPs inspected (those two reportedly represent 95 percent of the registered VASP market regarding exchange between fiat currency with crypto).
- Supervisory approach and gaps:
  - FI’s Innovation Center: first point of contact, provides guidance, collects market information, catalyzes internal FI discussions.
  - FI embeds digitalization considerations in day-to-day supervision rather than treating digitalization as a separate risk.
  - Identified gaps and recommendations:
    - Review adequacy of interaction between supervisors and Fintech firms to facilitate exchange of information and enhance understanding of risks.
    - Enhance data collection to support a more comprehensive analysis of Fintech and conduct periodically a review of the adequacy of the regulatory perimeter.
    - Investigate cooperation on data collection with Riksbank’s Statistical and/or Financial Stability Departments.
    - Periodically and systematically evaluate completeness of the regulatory perimeter; FI has done some scoping but not systematically.
    - Evaluate adequacy of supervisory resources: scarcity of specialized staff to review evolving Fintech business models and risks; challenges attracting and retaining technical experts in credit risk models and cybersecurity.
    - Ensure effective cooperation and communication across departments for Fintech firms operating across different financial subsectors.
    - Review adequacy of points of contact with Fintech firms to facilitate information exchange, enhance understanding of risks, enable forward-looking market scanning, and provide guidance to firms.
    - Assess outsourcing and third-party concentration risks given Fintech reliance on outsourcing (e.g., cloud services).

### RIKSBANK e-krona PILOT — TECHNICAL EXPERIMENTATION AND LESSONS
- Project timeline and phases:
  - 2020: Riksbank started a practical phase of the e-krona project, launching the e-krona pilot with technical support from Accenture. Two phases completed; Phase 3 under way.
  - Phase 1: technical platform relying on blockchain; token-based e-krona; legal underpinnings analyzed.
  - Phase 2: further development with private sector involvement (Handelsbanken and Tietoevry); tests included integration with participants’ systems, Point-of-Sale terminals, wallet development, offline transaction capabilities, and performance tests; legal analysis on financial confidentiality and personal data protection; e-krona in pilot would be considered to belong to same asset class as cash and cannot be interest bearing.
  - Phase 3: focus on programmability, private sector innovation atop e-krona, roles and responsibilities, settlement issues, and preliminary legal categorization; “Request for Information” issued in April; customized tests to be done throughout the year.
- Lessons from Phases 1 and 2:
  - Caps and interest rates on the e-krona are technically possible with blockchain technology; however, negative interest rates are incompatible with local storage of e-krona with exclusive control at the end user.
  - The e-krona network can operate in parallel with existing account and payment infrastructures, enabling interoperability and making the payments system more robust.
  - Centralized alias services raise responsibility issues for data management; responsibility could fall onto the Riksbank as owner of the e-krona network.
  - Offline payments are feasible with blockchain technology but carry fraud and integrity risks; regulatory framework needed to limit and manage these risks.
  - Integration with payments terminals is possible, leveraging existing regulations and administration; evolving concept of payment terminal requires regulatory frameworks and collaboration with retail trade operators.
  - Performance issues arise as tokens multiply and transaction chains increase; technical solutions need testing.

### RECOMMENDATIONS (SUMMARY)
- Central Bank Digital Currency (Responsible: Riksbank — Timing: ST)
  - Perform extensive analysis of CBDC financial safeguards, incentives for private adoption and participation, impact on the financial system, and monetary policy implementation and transmission. — Paragraph Reference: 63, 58–61.
  - Continue testing technical solutions to uphold the stability and resilience of the e-krona. — Paragraph Reference: 63, 62.
  - Continue strengthening regulatory frameworks and providing support to enhancing the legal framework. — Paragraph Reference: 63, 62.
- Fintech (Responsible: FI — Timing: ST)
  - Review the adequacy of interaction between supervisors and Fintech firms, to facilitate the exchange of information and enhance understanding of risks. — Paragraph Reference: 81.
  - Enhance data collection to support a more comprehensive analysis of Fintech and conduct periodically a review of the adequacy of the regulatory perimeter. — Paragraph Reference: 82–83.
  - Evaluate the adequacy of the supervisory resources to monitor and analyze Fintech firms, business models, and relevant risks. — Paragraph Reference: 84.
- Other recommended actions:
  - Conduct extensive testing of financial safeguards (lab settings, experimental economics, restricted trials).
  - Evaluate incentives for e-krona adoption by general public and private sector (focus groups, restricted tests).
  - Enhance analysis of impact on financial system, monetary policy implementation, and transmission.
  - Continue exploration of technical solutions and follow PFMI as guiding principles.
  - Consider partnerships with other central banks to share high fixed costs.
  - Continue legal and regulatory preparatory work.
  - Increase dedicated staff to e-krona development; some workstreams understaffed.
  - Cooperate with other authorities (for instance FI and SNDO) regarding impacts on the banking system and financial safety net arrangements.
  - Acknowledge risks of low adoption and clearly communicate rationale if issuance pursued.

*Source: IMF staff technical note and excerpts from 1sweea2023004 — EXECUTIVE SUMMARY and selected sections on e-krona risks, Riksbank activities, and Fintech in Sweden.*

### EXECUTIVE SUMMARY __________________________________________________________________________ 4

### EXECUTIVE SUMMARY

### INTRODUCTION
- Sweden characterized by high adoption of digital services in the financial sector and ongoing analysis on issuance of a Central Bank Digital Currency (CBDC, e-krona).
- Riksbank one of the pioneers in exploring retail CBDC; project started in 2017 with published reports and technical experimentations.
- Government inquiry on the means of payments ongoing as of December 2022; expected to inform authorities by end-March, 2023.
- Fintech sector: about 450 active firms offering payments, credit, technical infrastructure, and wealth management.

### CENTRAL BANK DIGITAL CURRENCY (e-krona) — Systemic Risks and Riksbank Response
- Main categories of systemic risk from e-krona issuance:
  - Financial risks (depend on usage and demand):
    - Risks depend on whether e-krona is used for transaction purposes or also as a store of value, and on whether demand is only domestic or also foreign.
    - Possibility of bank runs and structural outflow of deposits from the banking system (a slow run).
    - Banks could respond by increasing remuneration of deposits, limiting deposit outflow.
    - Extent of disintermediation will affect monetary policy implementation and transmission.
    - Foreign demand for e-krona could increase gross capital flows, potentially making them more volatile, resulting in a more volatile exchange rate, increasing financial vulnerabilities, and challenging monetary policy.
    - Many risks depend on design features of the e-krona, which are yet undecided.
  - Operational and reputational risks:
    - Operational risks include data privacy, integrity, and cyber risks arising from complexity and novelty for a central bank.
    - Lower-than-expected demand for e-krona could lead to reputational risks for the Riksbank, especially if implementation costs are high.

- Riksbank actions and capacity:
  - Riksbank has published several reports and in-depth analyses; contributed to international working groups; dedicated resources to testing technical e-krona solutions.
  - Set up 19 internal workstreams to analyze and propose design solutions for the operational model of the e-krona, and to identify and mitigate financial and operational risks. Workstreams staffed by full- and part-time resources from several functional departments.
  - Riksbank committed to an e-krona design that fulfills the “do no harm” principle: support public policy objectives and do not impede the central bank’s ability to carry out its mandate.
  - Recommendations stress extensive analysis of design features, incentives for adoption, financial safeguards, and impacts on the financial system and monetary policy; continue technical testing to build a stable and resilient ecosystem, especially against cyber risk; preparatory work on legal and regulatory frameworks; increase dedicated staff and collaboration across Riksbank departments and other authorities.

- Payment landscape context and usage statistics (preserve exact figures):
  - More than 90 percent of respondents to the Riksbank survey in 2020 indicated they have access to a bank card for payments connected to their bank account, and to online banking.
  - On average, only 50 percent of users commonly used cash for transactions in 2020, down from 92 percent in 2012.
  - Swish adoption and use:
    - 75 percent of survey respondents say they commonly used Swish in the last month more than they used cash.
    - In May 2022, there were 8.6 million users of Swish, of which 8.3 million were private accounts, and 319,000 businesses were offering payments via Swish.
    - The average number of Swish transactions per customer in May was 9.7, an increase of 23 percent compared to the previous year.
    - The average value of transaction in the same period was SEK 481 (around US$48).
    - The Swedish population in 2020 was 10.4 million.
  - Payment infrastructure developments:
    - RIX-INST system launched in May to provide settlement of instant payments in central bank money.
    - Major Nordic banks working on joint Nordic infrastructure for payments.

### FINTECH — Current Position, Risks, and Supervisory Recommendations
- Fintech sector observations:
  - Thriving Fintech ecosystem with about 450 active firms.
  - Based on a limited sample, Fintech firms appear on average small: the median firm has SEK 23 million in assets, or US$2.3 million, with 12 employees.
  - Some larger established firms exist.
  - Small exposure to the banking system (liabilities toward credit institutions); median firm holds no liabilities toward banks.

- Systemic risk assessment and supervisory gaps:
  - Systemic importance of Fintech sector seems limited but should be monitored closely as firms could grow fast, are complex and highly visible.
  - FI needs to enhance data collection to allow for comprehensive analysis of Fintech.
  - FI should investigate cooperation on data collection with Riksbank’s Statistical and/or Financial Stability Departments.
  - FI should regularly conduct a review of the completeness of the regulatory perimeter; market scoping to identify firms providing financial services without required licenses has been done but not systematically.
  - FI should evaluate adequacy of supervisory resources:
    - Scarcity of specialized staff to review and assess evolving Fintech business models and risks.
    - For Fintech firms operating across different financial subsectors, FI should ensure effective cooperation and communication across departments to maintain a holistic view of supervised entities’ risks.
  - FI should review adequacy of points of contact with Fintech firms to facilitate exchange of information, enhance understanding of risks, enable forward-looking market scanning, and provide guidance to firms.

### KEY RECOMMENDATIONS (Table 1: Sweden: Key Recommendations — preserve phrasing and timing)
- Central Bank Digital Currency
  - Perform extensive analysis of CBDC financial safeguards, incentives for private adoption and participation, impact on the financial system, and monetary policy implementation and transmission. — Paragraph Reference: 63, 58–61 — Responsible: Riksbank — Timing: ST
  - Continue testing technical solutions to uphold the stability and resilience of the e-krona. — Paragraph Reference: 63, 62 — Responsible: Riksbank — Timing: ST
  - Continue strengthening regulatory frameworks and providing support to enhancing the legal framework. — Paragraph Reference: 63, 62 — Responsible: Riksbank — Timing: ST
- Fintech
  - Review the adequacy of interaction between supervisors and Fintech firms, to facilitate the exchange of information and enhance understanding of risks. — Paragraph Reference: 81 — Responsible: FI — Timing: ST
  - Enhance data collection to support a more comprehensive analysis of Fintech and conduct periodically a review of the adequacy of the regulatory perimeter. — Paragraph Reference: 82–83 — Responsible: FI — Timing: ST
  - Evaluate the adequacy of the supervisory resources to monitor and analyze Fintech firms, business models, and relevant risks. — Paragraph Reference: 84 — Responsible: FI — Timing: ST

_1sweea2023004 - EXECUTIVE SUMMARY_

### 13.      This FSAP did not do a cost-benefit analysis, but it took the approach to analyze risks

### 13.      This FSAP did not do a cost-benefit analysis, but it took the approach to analyze risks

### Overview
- The FSAP did not evaluate benefits of e-krona; its scope is to analyze system risks arising from issuance of a CBDC, review ongoing activity at the Riksbank, and provide preliminary recommendations to fill gaps.
- Policy goals and possible benefits of e-krona are not considered in this note; focus is on potential risks of e-krona issuance and comparison with Riksbank activity.
- Recommendations are aimed at filling potential gaps.

### Financial risks of e-krona issuance — general
- The potential issuance of CBDC could give rise to financial risks, as well as operational and reputational risks to the Riksbank.
- The e-krona would be a new asset in the financial system; systemic risk could arise depending on whether it substitutes existing assets and how fast.
- The technical note evaluates financial, operational, and reputational risks and assesses preliminary Riksbank risk-mitigation activity.

### Key distinctions in risk drivers
- Demand source:
  - Domestic = demand by Swedish residents or foreigners while within Swedish borders (e.g., tourists).
  - Foreign = demand by foreigners not present in Swedish territory.
- Use:
  - Means of payment.
  - Store of value.
- The note does not consider the unlikely scenario that e-krona issuance would spur demand for a foreign CBDC in Sweden.

### Main domestic financial risk scenarios (closed-economy framing)
- If demand for e-krona is only domestic, three main financial risk scenarios are:
  - Large e-krona demand for store of value in normal times: the e-krona structurally replaces deposits as means of payment and store of value (disintermediation of the banking system, or a permanent run).
  - E-krona demand for store of value in crisis times: the e-krona provides an asset that enables systemic bank runs, or runs from other riskier asset classes.
  - E-krona demand purely as a means of payment: no structural substitution of deposits, but increased competition erodes banks’ and PSPs’ profits, potentially increasing vulnerabilities.
- If e-krona only substitutes cash, impact on the financial system would be minimal and mainly a change in the central bank’s balance sheet composition.

### Table synopsis (as presented)
- Table 2 maps financial risks depending on e-krona demand (Use × Source):
  - Use = Store of value; Source = Domestic → Fast: Bank run; Slow: Disintermediation of banks.
  - Use = Store of value; Source = Foreign → Financial substitution (abroad).
  - Use = Means of payment; Source = Domestic → Disintermediation of PSPs.
  - Use = Means of payment; Source = Foreign → Currency substitution (abroad).

### Risks from foreign demand
- If e-krona access is granted to foreigners, significant foreign demand could arise, especially during crises of confidence abroad.
- Potential consequences of foreign demand:
  - Currency and financial substitution in foreign countries.
  - Large and volatile capital inflows.
  - Effects on exchange rate and financial institutions’ hedging costs.
  - Effects on Riksbank balance sheet and increased vulnerabilities.

### Risks of disintermediation of the banking system
- Demand drivers:
  - Store-of-value demand in normal times depends mainly on the remuneration of e-krona and alternative liquid safe assets.
  - An unremunerated e-krona is unlikely to create significant store-of-value demand in a positive interest rate environment.
  - Transaction demand depends on design features (usability, privacy) and network effects.
- Literature shows varied possible outcomes: from no disintermediation to substantial disintermediation under particular circumstances.
- Riksbank preliminary calculations suggest that a demand for e-krona of about 1 percent to 3 percent of Swedish GDP would satisfy transactions and store-of-value needs.
- If deposits are disintermediated:
  - Banks may need alternative funding or shrink balance sheets, with negative consequences for financial stability and credit provision.
  - Substituting deposits increases banks’ funding costs; effects on lending rates depend on banks’ market power.
  - Lower profitability reduces capital generation capacity; higher loan rates could lower loan demand and lead to adverse selection toward riskier borrowers.
  - Banks could allow balance sheets to shrink, potentially causing tensions if asset liquidation is needed for redemptions.
- Banks’ strategic responses:
  - Banks could raise remuneration on deposits to limit outflows, reducing the liquidity premium of deposits and increasing funding costs and profitability pressures.
- Monetary policy implications:
  - Disintermediation can affect monetary policy stance, implementation, and transmission.
  - Transition effects could include banks using central bank reserves, upward pressure on short-term money market rates, and a need for the Riksbank to offer additional liquidity (subject to availability of high-quality collateral).
  - Longer term, Riksbank balance sheet might increase if e-krona demand is substantial, increasing seigniorage for an unremunerated e-krona and the central bank’s footprint.
  - Effects on transmission depend on remuneration: unremunerated e-krona has minor effects in normal conditions absent significant disintermediation; a remunerated e-krona could reinforce the interest rate channel.
- Very long run:
  - E-krona could lead to a narrow banking system (separating provision of liquid assets from long-term loans).
  - Welfare implications of narrow versus fractional banking are unclear.

### Domestic run risks
- E-krona could be a destination for runs during systemic crises affecting the financial system, providing a safe asset to store value.
- The presence of e-krona could increase the possibility of runs from other assets during systemic private-sector crises.
- If Swedish economy credibility is under strain, flight-to-safety may favor foreign-currency assets rather than e-krona.
- In idiosyncratic crises (some banks or asset classes), flight-to-safety could go to safe-bank deposits or to e-krona if available.

### Historical illustrative episode (SNDO in late 2008)
- Increased demand for safe deposits at the Swedish National Debt Office (SNDO, Riksgälden) in late 2008 likely reflected flight to safety.
- Between August and October 2008:
  - Amounts at SNDO increased by around SEK 17 billion, a 60-percent increase.
  - Deposits of households in monetary and financial institutions decreased by SEK 14 billion in the same period.
- SNDO deposits at peak represented about 5 percent of all household deposits in banks.
- SNDO accounts were discontinued in 2015.
- The availability of a digitally accessible risk-free and very liquid asset (e-krona) would likely increase incentives to transfer from bank deposits, especially in times of financial-system confidence strains.

### Role of deposit insurance and runnable deposits
- Deposit insurance in Sweden:
  - Commercial bank deposits are insured up to SEK 1,050,000 per institution, per person.
  - Covered deposits amounted to SEK 2,000 billion at the end of 2021.
  - Overnight and term deposits by households and nonfinancial corporations were around SEK 4,000 billion.
- Covered deposits were about half of total deposits by households and nonfinancial corporations at end-2021.
- Significant demand from uninsured deposits could still arise; wholesale investors not covered by insurance could also move to e-krona in crises.
- Even if uninsured outflows do not cause widespread runs, they could create financial strains on banks.

### Interaction with crises in other financial sectors
- If a crisis occurs in nonbank sectors (e.g., corporate bonds, investment funds), the availability of e-krona as an easy safe asset could create another avenue for runs.
- The presence of e-krona could change the composition of runs (from bank deposits to e-krona) without necessarily changing the overall incidence of runs.

*Source: IMF staff technical note summarizing risks and preliminary recommendations related to potential issuance of e-krona in Sweden.*

### 29.      Run for the e-krona during stress times may also complicate the monetary policy

### 29.      Run for the e-krona during stress times may also complicate the monetary policy

### Risks to the viability of payments service providers (PSPs) and impact on market structure
- If e-krona is used only as a payment instrument, it would generate lower aggregate risks, but it could still change the market structure of payments service providers by increasing contestability, and potentially eroding fee and commission income of banks.
- If the e-krona is used as a means of payment, individuals and businesses would likely only hold minor quantities in the e-krona wallet, possibly only for daily transaction needs, and top-up the e-krona wallet only when needed. In this case, demand for deposits, and the balance sheet of banks, would not be affected.
- Even if deposit balances are unaffected, e-krona would compete with existing means of payments and could potentially erode fee and commission income of current market players, impacting banks' capital generation capacity.
- Effect on market structure will depend on:
  - the degree of competitiveness in the digital payments markets, and
  - features of the e-krona (e.g., programmability beyond what can be offered via traditional bank accounts).
- Possible outcomes depending on market competitiveness:
  - If the payments market has substantial market power, introduction of the e-krona would likely lead to a large decrease in monopoly rents.
  - If the market is already competitive, the introduction of e-krona could lower the viability of some existing market players, leading to their potential exit.
- Features of the e-krona matter:
  - If the e-krona allows for new technological attributes (e.g., programmability), private players could provide new services and keep market share.
  - An e-krona embedded in existing payments apps would likely have a smaller impact on the market.
- The impact of e-krona issuance on PSPs and market structure is uncertain due to:
  - features of e-krona not yet certain, and
  - unclear degree of competitiveness of the payments market.
- Evidence on banks' reliance on payment income:
  - "net fee & commission income consists of up to 40 percent of total income, depending on the business model of banks."

### Risks arising from foreign demand for e-krona
- Two main potential sources of foreign demand if access is allowed:
  - i) a structural demand for e-krona for currency substitution abroad; and
  - ii) a flight to the safety of the e-krona in case of financial system distress in other countries.
- Temporary demand due to a crisis of confidence in one country could lead to permanent currency substitution.
- Drivers of foreign demand depend on geopolitical and economic considerations, and transaction costs. Factors include:
  - Sweden's geopolitical status, wealth, and economic stability (Sweden ranks high on these characteristics);
  - ease and cost of access to e-krona relative to current krona-denominated assets;
  - first-mover advantages if Sweden were the first advanced economy to introduce CBDC;
  - broader geopolitical events.
- Exchange rate feedback:
  - A large demand from abroad would put appreciating pressures on the krona, decreasing further demand; while the exchange rate could act as a dampener, this would come with potential macro-economic consequences for Sweden.
- Potential macrofinancial consequences of significant foreign demand:
  - large capital inflows, volatility in case of sudden reversals, and appreciation and volatility of the exchange rate, increasing financial vulnerabilities;
  - more volatile cost of funding in foreign currencies for local financial institutions;
  - increased hedging costs for financial institutions and the real sector.
- Increased and volatile money supply implications:
  - larger and more volatile balance sheet of the Riksbank, making forecasting autonomous factors more difficult and requiring more frequent fine-tuning of liquidity provision;
  - potential impairment of the smooth functioning of money markets.
- Two competing effects on yields from foreign demand and Riksbank operations:
  - foreign demand for krona-denominated assets could lead to lower yields on these assets;
  - open market operations to decrease money supply would involve sale of krona-denominated assets and push toward increasing yields.
- Net effect: coupling of volatile exchange rates and potentially impaired transmission of monetary policy through rates could decrease the efficacy of monetary policy, with negative consequences for economic growth.
- Potential upsides from increased foreign demand are uncertain and may take several years to materialize:
  - e-krona demand could increase demand for all krona-denominated assets, leading to reserve asset status and higher capital integration, but these processes might not materialize and will likely take a long time.

### Potential operational and reputational risks for the Riksbank
- Operational responsibility and reputational exposure:
  - As ultimate owner and guarantor of the e-krona system, any glitch, failure to operate or mishap, even if due to intermediaries or third-party providers, will likely be ascribed to the Riksbank, with consequential reputational loss.
- Systemic implications: decreases in confidence in money and in the Riksbank could arise; central banks are tasked to create trust in the currency and uphold public trust in means of payment.
- Operational risk spectrum: impacts can range from minor loss of service to major failures; risks depend on technical solution and organizational model chosen.
- Some possible operational risks identified:
  - Treatment of personal data: use of e-krona will likely require basic identity information and transaction recording; failure to manage personal data properly could give rise to breaches and reputational and legal consequences.
  - Resilience to cyber-attacks: the e-krona could be subject to cyber-attacks aimed at stealing e-krona or damaging the payments system; continuous attacks could cause operational stops if resilience is low.
  - Integrity: e-krona will need to satisfy AML/CFT regulations; failures in AML/CFT checks and provisions will lead to operational risks.
  - Outsourcing to third-party providers: while cost-effective, outsourcing could be a source of operational risks if proper safeguards and monitoring are not in place.
- Reputational risks arising from broader implementation issues:
  - Cost effectiveness: implementation will have significant costs (development, maintenance, upgrades, staff). High costs could raise public scrutiny and doubts about the Riksbank's capacity to manage issuance; costs will impact the Riksbank budget and might be recovered depending on demand for e-krona and impact on seigniorage.
  - Lower-than-expected demand: if demand is lower than expected, the Riksbank will likely be asked to provide explanations, especially after high development and deployment costs; this could be particularly relevant if intermediaries in a disintermediated distribution model do not have incentives to enlarge the user base.
  - Sustainability: energy resources necessary for the system could generate reputational risks if they exceed alternative payment options or if sustainability was not taken into account in design.

### Riksbank activity and mitigation of potential risks
- Historical and ongoing Riksbank work:
  - The Riksbank started the e-krona project in 2017 and published the first interim report; subsequent project report in 2018 and dedicated issues of the Riksbank’s Economic Review in 2018 and 2020.
  - Topics analyzed include demand for e-krona, effect on monetary policy and monetary operational framework, banks and bank lending, seigniorage, competition, and CBDC rationale.
- Internal organization and pilot:
  - In February 2019 the Riksbank established the e-krona pilot division with the task of exploring design, producing technical proposals, and investigating regulatory issues.
  - The e-krona pilot division has 11 Riksbank staff members.
  - The pilot focused on blockchain as the technological choice, but no final decision has been made on technology for issuance.
  - Reports of the first two phases of the pilot have been published; phase 3 is currently ongoing.
  - A key lesson from the pilot: need to establish a clear regulatory framework to assess risks for offline payments, set limits, and define ways to manage these risks.
- Current organizational efforts:
  - Since 2022, 19 workstreams have been set up within the Riksbank to look at various aspects of potential e-krona issuance.
  - The workstreams develop analyses and provide recommendations on areas ranging from design of policy instruments to managing e-krona demand, legal requirements, technological requirements, and setting up the ecosystem with the private sector.
  - The workstreams are staffed with around 40 Riksbank staff members from all functions of the central bank.
  - A coordination group including all workstream leads has been established to share information, identify priorities, and manage dependencies.
  - The Policy and Analysis Division in the Payments Department also works on e-krona analytical issues.
- External engagement and user studies:
  - The Riksbank issued a "Request for Information" in April to gather proposals for technical solutions from market participants; customized tests of proposed solutions will be done throughout the year.
  - A forum with representatives from banks, Fintech, retail firms, and universities has been set up to gather knowledge and information from stakeholders.
  - The Riksbank plans to develop user studies.
- Contribution to Government Inquiry:
  - The Riksbank contributes expertise to the Government Inquiry on payments via an advisory group; one expert from the Riksbank has been appointed by the government alongside other authorities.

### Riksbank workstreams on e-krona (selected descriptions)
- Workstream 1. Emergency preparedness
  - Define the requirements for an e-krona from a preparedness, continuity, and resilience point of view.
- Workstream 2. Data Privacy
  - The Data Protection Regulation (GDPR) places high demands on how personal data may be stored and handled in a digital context. The e-krona network will handle personal data; workstream to handle key aspects of this in relation to solution.
- Workstream 3. Operational Services
  - Requirements for Operational Services for an e-krona such as service levels, support and staffing internally and potentially externally depending on solution.
- Workstream 4. System & Application Management
  - Define governance of the system in order to ensure functionality and robustness including its applications and hardware.
- Workstream 5. Protective Security
  - Protective security refers to protecting information and activities of importance to Sweden’s security against espionage, sabotage, terrorist offences and certain other threats.
- Workstream 6. IT and Cyber Security
  - Both the infrastructure and participants of a CBDC system should be extremely resistant to cyber attacks and other threats. This should also include ensuring effective protection from counterfeiting.
- Workstream 7. System availability
  - Based on the recommendations around continuity and resilience, define system requirements around availability that meet the objectives.

*International Monetary Fund — Sweden: selected sections on e-krona risks, operational considerations, and Riksbank activities.*

### 8. Performance An e-krona system will need to be able to meet volume and throughput requirements at a justifiable

### 8. Performance An e-krona system will need to be able to meet volume and throughput requirements at a justifiable cost. This means requirements on a scalable system that meets the highest performance requirements.

### Key technical and design requirements
- Performance: scalable system meeting highest volume and throughput requirements at a justifiable cost.
- Architecture: must satisfy security, functionality, accessibility, performance, flexibility, and scalability; allow further development over a long period to meet identified and future needs.
- Offline: explore feasibility and risk allocation with offline functionality for an e-krona.
- Information Security: define and enforce requirements during the project and beyond related to Information Security.
- Product Features and Functional Services: define services, features and product functions an e-krona should have.

### Legal, regulatory, and sustainability considerations
- Laws and regulations: e-krona infrastructure and participating entities must conform to appropriate national and international regulatory standards; includes reviewing current legislation and suggesting changes as needed.
- Sustainability: define requirements for a sustainable future e-krona consistent with Riksbank’s Sustainability strategy (environmental, social, and other aspects).

### Identity, governance, and distribution
- Identification: define guidelines for identity schemes to preserve integrity while fulfilling e-krona objectives.
- Schemes and Governance: define governance and scheme including roles, responsibilities, frameworks, agreements, certifications, communication, and distribution.
- Wholesale: explore implications for existing wholesale distribution, coexistence with retail-focused e-krona, and recommendations on a wholesale CBDC in Sweden.
- Intermediated distribution model: Riksbank is considering a two-tiered model where CBDC is distributed by intermediaries; exact roles of Riksbank and intermediaries not fully defined; decision pending on whether intermediaries will be only banks or also PSPs, including Fintech firms.
- Private-public collaboration: scope and extent still under exploration; Workstream 15 analyzing how to structure private-public collaboration; need clear regulation and supervision of intermediaries.

### Cross-border and international collaboration
- Cross-Border Payments: explore how e-krona might enhance cross-border payments through collaborative work with central banks and organizations.
- International cooperation: Riksbank contributes to several international working groups; contributed to G7 public policy principles for retail CBDCs (2021); collaborating with Bank of Canada, Bank of England, Bank of Japan, European Central Bank, Federal Reserve, Swiss National Bank, and BIS on retail CBDC work—so far, three reports have been published (on private-public collaboration and interoperability; on how CBDC could best serve people and businesses; and on impact on banking systems), with several workstreams ongoing.

### Risk analysis and mitigation measures
- Broad approach: Riksbank investigating mitigation of financial and operational risks; analysis broadly in line with this note; several workstreams analyzing design options.
- “Do no harm” commitment: Riksbank committed to an e-krona design that fulfills the “do no harm” principle (support public policy objectives, not impede central bank’s mandate).
- Financial safeguards under consideration:
  - Unremunerated e-krona: being considered; legal constraints motivate no-interest-bearing design; will limit incentives to hold e-krona but has implications for financial stability and could reinforce the zero lower bound in monetary policy.
  - Fees and quantitative restrictions: evaluating possibility of introducing fees and/or quantitative restrictions on holdings, potentially differentiated by user type.
  - Demand-control tools: price incentives (fees or penalty rates) and hard limits on holdings; sweeping deposit accounts could be used so settlement of payments is ensured when maximum holdings reached.
  - Calibration challenges: fees and limits require careful calibration; too restrictive limits or too high fees will stifle demand.
  - Crisis scenarios: fees or limits alone may be insufficient in widespread crisis of confidence; mix of fiscal and monetary measures likely needed.
- Empirical and experimental approach: lack of consensus on effective safeguards; recommend experimental approaches, lab settings, restricted trials, and empirical analyses to guide design; consider measures that depend on rate of aggregate deposit outflows (tighten limits if outflows are very high); monitoring of bank balance sheets and e-krona demand will be required.
- Operational risks and resilience:
  - Intermediated model does not shield Riksbank from operational risks; Riksbank likely core owner of infrastructure and supervisor of intermediaries.
  - Workstream 15 analyzing AML/CFT implications; intermediaries would onboard and perform AML/CFT checks in intermediated model.
  - Technology testing needed for systemic stability, resilience to system failures and cyber-attacks.
  - PFMI: use Principles for Financial Market Infrastructure as guiding principles to build the e-krona ecosystem even if legal classification as a payment system is unclear.

### Adoption, reputational and incentive issues
- Low adoption risk: e-krona adoption could be elusive given widespread alternative digital payment methods in Sweden; potential low use among the elderly.
- Incentives for intermediaries and merchants: e-krona could erode banks’ income from payment services and reduce incentives for banks to join the ecosystem; allowing private intermediaries to build services on top of payment function (e.g., wealth management) could increase incentives; merchant incentives to accept e-krona should be analyzed.
- Workstreams: Workstream 11 (Product Features and Functional Services) focuses on measures to limit low e-krona demand; Workstream 10 focuses on sustainability.

### Institutional capacity and resources
- Institutional changes: Riksbank reorganized to support e-krona work; e-krona pilot division renamed e-krona division under Payments Department; scope enlarged to support overall workstreams.
- Resource needs: increased dedicated resources will be necessary if project proceeds—especially for analysis of financial safeguards, economic impacts, private-public collaboration models, legal and regulatory groundwork, and technological testing.
- Comparative note: People’s Bank of China has about 300 staff engaged in CBDC-related projects (IMF reference); CBDC projects are resource-intensive with fixed costs largely independent of scale.

### Assessment summary
- Comprehensive approach: Riksbank has recognized and transparently communicated risks; breadth and depth of analysis commendable.
- Ongoing work: no firm design choices yet; workstreams in early stages; all activities (workstreams, technical experimentation, international collaborations, policy needs) will feed into e-krona requirements.
- Areas needing extensive further analysis: technical and analytical work, comprehensive testing of designs, financial safeguards design and calibration, empirical testing of user incentives, impact on payments market structure, resilience and PFMI alignment, legal and regulatory groundwork.

### Recommendations (as stated)
- Conduct extensive testing of financial safeguards features (lab settings, experimental economics, restricted trials).
- Evaluate incentives for e-krona adoption by the general public and the private sector (focus groups, restricted tests).
- Enhance analysis of impact on the financial system, monetary policy implementation, and transmission.
- Assess and evolve the vision for the e-krona over time.
- Continue exploration of technical solutions, and follow PFMI as guiding principles to build the e-krona ecosystem.
- Evaluate setting up partnerships with other central banks for the development of the e-krona to share high fixed costs.
- Continue working on legal and regulatory preparatory work to create a sound legal framework for issuance.
- Increase number of dedicated staff to e-krona development; some workstreams are understaffed (e.g., policy instruments and private sector collaboration schemes).
- Cooperate with other relevant authorities (for instance with FI and the SNDO) regarding impacts on the banking system and existing financial safety net arrangements.
- Acknowledge risks of low adoption and clearly communicate why issuance would be beneficial in that case.

*Source: Excerpt from the IMF country report section on e-krona design, risks, workstreams, and recommendations.*

### 64.      Fintech is  technological innovation in financial activities. Financial activities have always

### Fintech is  technological innovation in financial activities. Financial activities have always

### Definition and scope
- Uses the Financial Stability Board working definition: “technologically enabled financial innovation that could result in new business, models, applications, processes, or products with an associated material effect on financial markets and institutions and the provision of financial services.”
- The review focused on Fintech firms (excluding the use of Fintech by incumbent regulated financial institutions).
- Purpose: propose criteria for defining materiality of Fintech firms, perform a limited analysis on some criteria, and evaluate FI’s monitoring, regulatory, and supervisory approach.

### Fintech landscape and monitoring
- Evidence of a thriving Fintech ecosystem in Sweden:
  - Tillväxtanalys identified about 450 Fintech companies operating in Sweden in 2019.
  - The number of employees in Fintech increased from just over 340 in 2000 to almost 9,750 in 2018, which translates to a median growth of about 20 percent per year.
  - Growth has been steady over the last 18 years, with a plateau in the last 2 years due to consolidation.
- Primary activity areas: payments, credit provision, and infrastructure; clear-cut categorization is often impossible (example: Klarna spans banking, payments infrastructure, and consumer credit).
- Monitoring challenge: many Fintech business models combine multiple licenses or cover parts of the value chain (e.g., payments services offering deposit-like liabilities without maturity transformation).
- FI’s Innovation Center:
  - First point of contact for firms seeking regulatory guidance.
  - Tasks: (i) give guidance to companies on new products and services; (ii) collect market information; (iii) catalyze internal FI discussions on Fintech, digital assets, and other innovations.
  - Arranges seminars and participates in external events.
- FI embeds digitalization considerations in day-to-day supervision; digitalization is not treated as a separate risk but as a driver of traditional risks, consumer behavior change, and legal issues.

### Materiality criteria and limited-scope findings
- Materiality and potential systemic relevance evaluated holistically by:
  - Size (assets, employment; and other metrics where relevant, e.g., number of users and transaction volumes for PSPs).
  - Nature and risk profile (type of activities, client base, importance of timeliness, leverage, maturity and liquidity mismatch for credit providers).
  - Interconnectedness (financial and operational linkages, cross-ownership, cross-border provision of services).
  - Concentration (availability of alternative providers).
- Sample analysis: 51 firms registered or licensed by FI were analyzed on balance sheet, profitability, and interconnectedness (values for the year 2020; monetary values in SEK millions).
  - Selected statistics (Table 3, 2020 values):
    - Assets: Mean 5800; Median 23; 25 percent 4.4; 75 percent 233.
    - Equity: Mean 414; Median 14; 25 percent 2.2; 75 percent 39.
    - Employees: Mean 109; Median 12; 25 percent 4; 75 percent 30.
    - Liabilities: Mean 5340; Median 5.4; 25 percent 1.2; 75 percent 112.
    - Liabilities/Equity: Mean 6.9; Median 1.1; 25 percent 0.4; 75 percent 3.3.
    - Liabilities/Assets: Mean 0.5; Median 0.51; 25 percent 0.26; 75 percent 0.76.
    - Liabilities toward credit institutions: Mean 68; Median 0; 25 percent 0; 75 percent 0.5.
    - Operating profits/losses: Mean 26; Median -1.0; 25 percent -19.6; 75 percent 4.0.
  - Median firm characteristics: SEK 23 million in total assets; 12 employees; SEK 14 million in equity; operating loss of SEK 1 million (median).
  - Interpretation: many firms are small, rely mostly on equity funding, and are often not yet profitable.
- Interconnectedness with banks:
  - Total liabilities toward credit institutions around SEK 3.5 billion for the sample, about 70 percent of which is attributable to a large single company.
  - About 75 percent of sampled firms had zero or very limited liabilities toward banks.
  - Among the 450 Fintech firms identified by Tillväxtanalys, only one instance of reported significant bank exposure (exceeding 5 percent of CET1) was found.
- Leverage:
  - Median liabilities/equity ratio about 1.1.
  - 10 percent of firms have liabilities/equity ratio of at least 15 (some explained by business models such as mortgage providers or brokerage services).
  - Liabilities/assets ratio distribution fairly uniform; median 0.51.
- Outsourcing and third-party concentration risks were not analyzed; these are relevant given Fintech reliance on outsourcing (e.g., cloud services) and should be assessed holistically across the financial sector.

### Regulatory and supervisory approach
- Sweden participates in EU legislative development; national frameworks largely based on EU directives and regulations (except banking union provisions).
- Important EU Fintech-related proposals (published November 2020, not yet enacted in the source):
  - Markets in Crypto-Assets Regulation (MiCA).
  - Digital Operational Resilience Regulation (DORA).
- Sweden enacted Regulation (EU) 2020/1503 (harmonized crowdfunding framework) in November 2021 and adopted supplementary national legislation for supervisory and investigatory powers of FI.
- FI’s mandate and responsibilities:
  - Integrated authority for supervision, regulation, and licensing of financial markets and institutions, and for measures to prevent financial imbalances.
  - Financial Supervisory Authority Ordinance (2009:93) requires FI to ensure a stable financial system, well-functioning markets, high consumer protection, and contribution to sustainable development.
  - FI is responsible for Money Laundering (ML) and Terrorist Financing (TF) supervision for supervised financial institutions, including specialized nonbank lenders and all registered entities.

### Virtual Asset Service Providers (VASPs) and ML/TF risk
- VASP sector growth and scale:
  - Number of registered VASPs increased from 3 in 2018 to 9 in 2022.
  - Services expanded from exchange between virtual assets and fiat to include transfer, safekeeping or administration of VAs, and provision of financial services related to issuance of VAs.
  - Sector balance sheet SEK 193 million (US$19.3 million) and remains insignificant compared to the banking sector.
  - About half of the VASPs engage in cross-border transactions.
- ML/TF risk understanding and supervision:
  - Sweden has regulated VA exchangers for AML/CFT since 2013, but national risk understanding lacks sufficient detailed information across VA types, VASPs, and activities.
  - FI rates VASPs as “very significant” for ML/TF risk but lacks clarity on comparison to ML/TF risks of banks.
  - All VASPs have been rated medium-risk since 2017; FI lacks entity-level ML/TF risk differentiation.
  - Supervisory activity: little supervision since 2015; supervisory activities resumed in 2021 with two out of nine VASPs inspected (those two reportedly represent 95 percent of the registered VASP market regarding exchange between fiat currency with crypto).
  - FI diverted resources from bank supervision to supervise VASPs; the report notes this may not be advisable given banks’ significant ML/TF risks.
  - Recommendations and observations:
    - Deepen understanding of ML/TF risks at national, sectoral, and entity levels to calibrate FI resource allocation.
    - Apply a proper risk-based approach at sectorial and entity levels for AML/CFT supervision of VASPs.
    - Enhance efforts to identify and stop unregistered VASPs, including increased collaboration with other agencies (e.g., FIU, Swedish Tax Authority).
    - Monitor ML/TF risks from non-VASP actors in the Fintech space and take effective measures where warranted.

*Source: IMF staff review of Fintech in Sweden (excerpts from the supplied content unit).*

### 78.      The increased reliance on technology that Fintech has, in some instances, necessitated

### 1sweea2023004 - 78.      The increased reliance on technology that Fintech has, in some instances, necessitated

### Fintech changes to supervisory scope and approach
- Automated credit approval processes have made it necessary for FI to change the scope of its supervisory activities (for incumbents as well as for Fintech firms), such as onsite credit risk inspections.
- When standardized (analytical) models are used in the credit assessment process, there is normally no difference between credit files and, sometimes, there are no credit files but only data records.
- During consumer protection inspections to review approach to credit risk assessment when granting consumer credit, FI has looked more closely into the information used in the process and the construction of the models.

### Recent supervisory activities and focus areas
- Recent supervisory activities on Fintech focused mostly on AML/CFT compliance, in addition to scoping the market for unlicensed activities.
- FI conducted both on- and offsite supervisory activities on several Fintech companies regarding AML/CFT compliance, which, in some cases, led to warnings and sanctions.
- These activities were focused on PSPs and VASPs.
- FI has been conducting an evaluation of compliance with PSD2 provisions on several supervised firms, which included Fintech companies.
- FI coordinated with the Swedish Tax Authority to identify financial activities that are being provided without a license.
- Further scoping is done through the Innovation Center, with an event-based approach to supervision of these entities.

### Key findings on systemic importance and market developments
- Systemic importance of the Fintech sector seems limited but it should be monitored closely because it can grow fast, is complex and highly visible, and requires attention from a consumer protection perspective.
- Firms in some sectors (payments, credit provision) have been growing in the past years.
- Market reports indicate that between 2017 and 2021, Swedish Fintech firms received euro 4.4 billion in venture capital funding.
- Klarna accounted for at least half of the funding.
- Fintech is the third most funded sector among Swedish technological start-ups between 2017 and 2021, and is the sector with the second largest number of financing rounds between 2017 and 2021.
- Sweden is third among European countries in venture capital funding to start ups. Funding in Swedish startups in 2021 increased twofold compared to 2020.

### Recommendations for FI (supervisory authority)
- Review the adequacy of its points of contacts with Fintech firms to enhance understanding of different Fintech business models and the involved risks.
  - Communication between FI and Fintech firms seems to be sparse, which may undermine FI’s ability to identify risks.
  - More communication could help supervisors better understand business models and risks, and provide clarity on regulatory and supervisory approach.
- Enhance data collection to allow for a comprehensive analysis of Fintech activities and firms.
  - While FI receives regulatory reporting from licensed institutions, it does not collect comprehensive data on Fintech firms that would allow assessment of the sector more broadly.
  - FI should investigate cooperation on data collection with Riksbank’s Statistics or Financial Stability departments.
  - Note: information collected from licensed institutions might provide only a partial view (example: payments statistics are collected for payment service providers but not for fintech firms with a banking license).
- Periodically and systematically evaluate the completeness of the regulatory perimeter.
  - EBA identified that about 30 percent of sampled Fintech firms were not subject to any regulatory regime under the EU or national law (sample covered Europe; the study did not provide figures for Sweden).
  - Such firms provided payments services, credit, deposit, and capital raising services, investment services, or combinations thereof.
  - FI has undertaken some scoping to identify firms providing financial services without required licenses, but this has not been done systematically.
- Evaluate the adequacy of supervisory resources to monitor and analyze Fintech firms, business models, and relevant risks.
  - There appears to be a scarcity of specialized staff to review evolving Fintech business models and related risks.
  - FI has faced challenges attracting and retaining technical experts in the supervision of credit risk models and cybersecurity experts.
  - For Fintech firms that work across different financial subsectors, FI should ensure effective cooperation, communication, and a holistic view on the risks of the supervised entity.

### Riksbank e-krona pilot (Annex I) — technical experimentation and lessons
- Project timeline and phases:
  - In 2020, the Riksbank started a more practical phase of the e-krona project, launching the e-krona pilot with the technical support of Accenture. The pilot has so far undergone two phases, and a third phase is under way.
  - Phase 1: a technical platform for e-krona was developed relying on blockchain technology and featured a token-based e-krona; legal underpinnings of the tested solution were analyzed.
  - Phase 2: the technical platform was further developed with private sector involvement (Handelsbanken and Tietoevry). Tests included integration with participants’ internal customer, account and payment systems, integration with Point-of-Sale terminals, wallet development, offline transaction capabilities, and performance tests. Legal analysis focused on applicability of laws on financial confidentiality and personal data protection and on legal properties of the e-krona.
  - Phase 3 (to continue testing technical solutions and legal requirements during 2022): will focus on programmability options, whether the private sector can deliver innovations on top of the e-krona platform without prejudice to safety, cooperation with the private sector, roles and responsibilities, settlement issues, and preliminary considerations on legal categorization of the e-krona system. The Riksbank issued a “Request for Information” in April to gather proposals for technical solutions; customized tests of proposed solutions will be done throughout the year.
- Lessons from Phases 1 and 2 (as summarized):
  - Caps and interest rates on the e-krona are technically possible with the blockchain technology; however, negative interest rates are incompatible with local storage of e-krona with exclusive control at the end user.
  - The e-krona network can operate in parallel with existing account and payment infrastructures, enabling interoperability between the two. This will make the payments system more robust.
  - Centralized alias services raise the issue of who is responsible for developing and managing the data. This could fall onto the Riksbank as owner of the e-krona network.
  - Offline payments are feasible with the blockchain technology; however, they carry risks of fraud and integrity. A regulatory framework needs to be established to limit and manage these risks.
  - Integration with payments terminal is possible, and this allows the Riksbank to leverage on existing regulations, procedures, and administration. However, the concept of what is a payment terminal is evolving, and regulatory frameworks and collaboration with retail trade operators are required to establish the e-krona as a means of payments.
  - Performance issues arise once tokens multiply, and transaction chains increase. Some solutions are technically possible but will need to be tested.
  - The e-krona in the pilot would be considered to belong to the same asset class as cash. Thus, it cannot be interest bearing.

*Source: 1sweea2023004 - 78. The increased reliance on technology that Fintech has, in some instances, necessitated (PDF chapter/section).*

---


_Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1sweea2023004.pdf_