The Shift to a Cashless Economy and Digital Currencies

Recent years have seen a significant shift in both the level of consumer spending and the payment methods used by households. The amount that customers spend is influenced by complex macroeconomic drivers, including changes in disposable income, tax policies, and consumer sentiment. During an economic expansion, high levels of confidence often drive a consumer-led boom. Conversely, during periods of economic contraction or recession, aggregate demand can fall sharply. Fig. 1 illustrates how consumer spending reacts as national income changes.

Fig. 1 The relationship between changes in national income and consumer expenditure

Changes in economic injections and leakages affect a nation's equilibrium GDP. It has been estimated, for example, that an initial injection of 400m Swedish Krona (SEK) of government infrastructure expenditure into the Swedish economy would lead to an eventual cumulative rise in GDP of 600m SEK.

The use of physical cash for transaction purposes is declining rapidly across Europe, most notably in Scandinavia. In Sweden, approximately 60% of retail transactions were conducted in physical cash in 2010. By 2018, this figure had fallen to 20%, and it is projected to drop below 5% by 2026. This decline directly affects currency management, including the volume and value of banknotes printed and kept in circulation. Fig. 2 shows the total value of Swedish banknotes in circulation over a five-year period.

Fig. 2 Value of banknotes in circulation (billion SEK) 2017–2021

Several monetary policymakers and central banks support a fully digital currency and a cashless state. One prominent argument is the role physical cash plays in sustaining shadow economy operations, such as tax evasion and illicit trading. However, a more fundamental economic motive is to remove the 'zero lower bound' of interest rates. This allows central banks to set deeply negative policy rates during severe demand-side shocks. When cash remains a viable alternative, households and firms can avoid negative rates simply by holding physical currency outside the banking system, which limits the policy's capacity to boost aggregate demand.

Negative interest rates require commercial financial institutions to pay a fee to deposit excess reserves at the central bank. Rather than paying these fees, banks are incentivised to expand credit and lend to businesses and households. If commercial banks cascade these negative rates down to their depositors, savers are penalised, while borrowing becomes highly economic. Consequently, negative rates alter exchange rates, domestic credit growth, and national debt service costs.

Several major central banks—the Swiss National Bank, Denmark's National Bank, the Bank of Japan, and the European Central Bank (ECB)—have operationalised negative interest rates over the last decade to combat deflationary traps and kickstart growth. However, critics point out the unintended consequences, including damage to commercial bank interest margins, erosion of consumer confidence, and the penalisation of cautious savers.

Fig. 3 Sweden's central bank repo rate (%) 2012–2021

While monetary authorities evaluate central bank digital currencies (such as the proposed Swedish e-krona), phasing out cash entirely raises key distributional issues. Digital-only payments risk isolating vulnerable demographics, including the unbanked, the elderly, and rural low-income households. Structural unemployment also remains a threat during severe downturns. The efficacy of monetary remedies in resolving unemployment depends heavily on structural labor market dynamics, the speed of wage adjustments, and institutional retraining programs.