Digitalisation brings changes. It gives us new ways to buy and pay for goods, and new ways of transferring money to each other. However, increased digitalisation and new digital technologies can also have a bearing on the growth potential of the economy and labour market developments, as commodity prices and our international trade are impacted by digitalisation.
Digitalisation also opens up new avenues for fraud and cybercrime. In addition to exploring and supporting new digital payment options, Danmarks Nationalbank’s focus on digitalisation is also about ensuring that digitalisation does not affect the stability of the financial sector or the digital payments infrastructure for which it is responsible.
Digitalisation is changing the Danish economy
Many people can probably remember the dot-com bubble in the early 2000s, when people worldwide became aware of the possibilities offered by the Internet for digitalising everything from shopping to simple self-service solutions. For some dot-com companies, success was short-lived, but digitalisation continues to this day to drive changes in the global community, including both Danish trade and industry and the Danish financial sector.
Therefore, digitalisation is also an important theme for Danmarks Nationalbank’s ongoing work to understand and assess the Danish economy. Although the development is being seen and felt most clearly in the individual companies and banks, digitalisation is also having a deeper impact on the economy.
For example, the survey conducted in 2022 by Danmarks Nationalbank’s economists of Danish companies from 2001 to 2018 showed that within several business sectors, it was the companies that had implemented digital technologies and assets to the greatest extent that also experienced the biggest growth in revenue. The same survey could also document that the workforce in the IT sector had become more specialised. This has resulted in higher levels of productivity for the companies, but it can also lead to reduced flexibility among IT employees.
Digitalisation influenced how the coronavirus pandemic was handled
In a survey from 2021, Danmarks Nationalbank’s economists concluded that the economies of highly digitalised countries have performed better following the coronavirus pandemic than less digitalised countries. This is partly because the more digitalised countries were able to ensure a higher degree of economic continuity during the pandemic as it was easier for citizens, businesses and the public sector to transfer more retail trade online and maintain many work functions by working from home.
Denmark is one of the most digitalised countries in Europe when it comes to payments
Danes have largely embraced digitalisation. In a survey from 2022, the European Commission concludes that 93 per cent of the Danish population uses the Internet to access public services, which is the highest percentage in the EU. Denmark is also one of the countries in Europe with the largest proportion of the population doing online shopping. 88 per cent of the Danish population has shopped online in the past three months against an EU average of 68 per cent.
The digital enthusiasm is also evident in the payment area, where the use of digital money has long since overtaken the use of cash. Danmarks Nationalbank’s ongoing analyses of Danes’ payment habits show that most payments today are made digitally. In 2021, almost 9 out of 10 payments in physical stores were made digitally, i.e. with a payment card or smartphone. This makes Denmark one of the countries with the highest number of card transactions per capita. In 2021, each Danish consumer made 393 card transactions on average. The EU average is 167.
Danmarks Nationalbank continuously monitors digital developments, and contributes to ensuring that the Danish payments infrastructure – and thus Danish citizens – continues to benefit from the new possibilities brought about by digitalisation. The starting point for our work is that payment systems and solutions must be effective and secure to use for Danes.
Cyber security is essential for financial stability
Security in payment systems and solutions is not just about minimising the risk of technical errors. Increased digitalisation also entails an increased risk of cyberattacks, where individuals or organisations with malicious intentions can exploit the digital systems for their own gain. For example, to transfer money to themselves or by putting one or more payment systems out of operation and in this way influence a crucial function in society: the thousands of payments and money transfers that take place every single day between citizens, companies, banks etc.
Danmarks Nationalbank works to maintain stability in the financial system in general, and also owns specific systems in the Danish payments infrastructure. We therefore continuously monitor and test our own security and crisis response as well as that of the financial sector in general. In other words the operational resilience.
Danmarks Nationalbank works with operational resilience on two levels: internally at Danmarks Nationalbank, and as part of a forum comprising key players in the financial sector who coordinate both preventive work and the crisis response in the event of incidents occurring that may affect financial stability. Danmarks Nationalbank chairs and acts as secretariat for the forum, which is called the Financial Sector forum for Operational Resilience, or FSOR. The work includes a risk analysis at sector level, which is updated every six months, as well as large crisis response exercises across the financial sector.
New types of digital money in future?
Digitalisation is seeing rapid development, and in recent years new technological advances and new financial entities have created an interest in and a debate about new types of digital money and assets. There is great interest in, among other things, crypto-assets (e.g. bitcoin or ethereum), so-called stablecoins and central bank digital currency (CDBC).
Danmarks Nationalbank is working to ensure access to secure and efficient forms of money and payment solutions for Denmark. This applies regardless of which solution, provider or technology may be behind the development of new types of digital money or payment solutions.
New types of money can potentially supplement the money we have today if the available payment solutions keep up with the increasingly digitised economy. But new types of digital money and means of payment also bring new risks such as fraud and cybercrime. Danmarks Nationalbank therefore monitors developments in this area closely.
Crypto-assets and stablecoins are characterised by uncertainty and large price fluctuations
Crypto-assets are subject to high speculation and are characterised by uncertainty and dramatic price fluctuations. This is compounded by the fact that, unlike traditional financial assets, the value of crypto-assets is not supported by an underlying income flow or productive value.
Even though the dramatic price fluctuations of crypto-assets receive a lot of media attention, the spread of crypto-assets and stablecoins is still very limited. At present, Danmarks Nationalbank therefore assesses that the spread of crypto-assets has limited significance for the stability of the financial sector.
However, there are risks associated with facilitating financial services, regardless of the technology behind it, and thus crypto-assets could have long-term implications for financial stability if the take-up continues the current trend.
Not all issuers of stablecoins manage to maintain a stable value and thus ensure that buyers or investors can exchange their stablecoins for the assets to which the stablecoin in question is supposed to be pegged. In particular, for some types of stablecoins, there have been examples where even minor value fluctuations have led to uncertainty among investors, with resulting sharp declines in the value. This was the case, for example, for the stablecoin TerraUSD, which collapsed in May 2022.
The technology behind crypto-assets and stablecoins is called distributed ledger technology (DLT) and is characterised by the assets being supported by a decentralised infrastructure.
EU legislation will apply from 2024
There is a need for increased and internationally coordinated regulation of the markets for crypto-assets and stablecoins and other new types of digital money similar to that which currently exists for banks, mortgage credit institutions and pension companies. The guiding principle must be that identical activities are subject to the same regulation.
In the EU, a regulation for markets in crypto-assets (the MiCA Regulation) will formally enter into force in July 2023. However, the regulation will not apply until the beginning of 2024. The object of the MiCA Regulation is to regulate companies that issue and provide services related to crypto-assets.
Reflections on central bank digital currency (CBDC)
Central banks are increasingly exploring new technology as well as the possibility of issuing so-called central bank digital currency (CBDC). Several studies, for instance on the existing infrastructure for the settlement of interbank payments, can be supplemented with DLT.
Payments between banks based on DLT are called wholesale CBDC. Wholesale CBDC can potentially form the basis for faster and more effective payments between financial institutions, including cross-border payments across currencies.
A central bank digital currency for citizens is also being examined by many central banks, but few have yet decided to issue such a retail currency. The reasons for examining the possibility of a retail CBDC vary greatly between central banks.
In Denmark, the financial system is well-functioning, the payments infrastructure is secure and efficient, and all Danes have access to a basic bank account. This is one of the reasons why Danmarks Nationalbank does not deem it clear how a retail CBDC in Danish kroner can contribute to better and more secure access to payments and financial services or to creating securer and more efficient solutions for citizens and society in general.
Therefore, Danmarks Nationalbank monitors the development closely and participates actively in international working groups and forums that focus on new payment technology and on the opportunities and risks associated with a retail CBDC.
Nordic cooperation on digitalisation
As part of its work with digitalisation, Danmarks Nationalbank has established a Nordic innovation centre in Stockholm together with the Bank for International Settlements (BIS) and the central banks in Norway, Sweden and Iceland. The innovation centre will, among other things, work with projects on central bank digital currency and new systems for analysing payment data.
More specifically, the Nordic innovation centre is investigating the possibility of offline transactions using central bank digital currency and the possibility of identifying illegal activities such as money laundering using real-time data from payment systems.