Cash and digital money: beware the Stockholm syndrome
The digital euro is a public investment that needs to be made as soon as possible. Europe must maintain both physical and digital euros. The rationale is straightforward: the less public money is used, the greater the risk of becoming hostage to private and foreign monies – often without realizing it, and even inadvertently encouraging them. This is a kind of Stockholm syndrome, and it is precisely what is happening in Sweden. The only institution sounding the alarm is the central bank, while politicians have so far ignored the issue. Is this a case of regulatory capture?
The starting point is simply to experience what it means to live in a country where cash has virtually disappeared – something immediately evident after just a few days in Stockholm. The aggregate data confirm this impression: among industrialized countries, Sweden – together with Norway – shows an exceptional pattern, with cash usage collapsing. Why has this happened? And does it truly matter?
The answer to the first question comes from the economics of money demand, which teaches us that state-issued money, in addition to being the unit in which prices are expressed, fulfils two functions: it is a means of payment and a store of value. Each function responds to a different form of risk that individuals seek to minimize.
On the one hand, every economic agent seeks to minimize liquidity risk – the risk of being unable to use purchasing power when needed. Liquidity risk is highest in a barter economy; hence every community eventually “invents” money, an instrument accepted in the exchange of goods and services. Public money, endowed by law with legal tender status – meaning no one may refuse it – is the means of payment par excellence.
On the other hand, every agent seeks to minimize the risk of erosion in purchasing power – income and wealth measured in goods and services. Public money does not yield a return, but as the unit of account it maintains its nominal value, and thus can function as a store of value.
With cash, a further distinction emerges that helps separate these two functions: the difference between normal-denomination banknotes and large-denomination ones. Normal banknotes are typically used as a means of payment, while large ones are held more as a store of value. This allows us to distinguish between a “transactions demand” for cash – reflected in the use of normal notes – and a “hoarding demand,” seen in the use of large notes.
Sweden’s peculiarity becomes clear when one focuses on large-denomination notes. In general, individuals may demand them as a store of nominal value. Then there are “particular” users who prefer cash for its anonymity – a preference rooted either in cultural sensitivities about privacy or in economic motives arising from illegal activities ranging from tax evasion to criminal operations. Moreover, it is important to distinguish between normal times and periods of crisis: in the latter, data show a rising propensity to hold public money at the expense of privately issued money, typically bank deposits.
Sweden is special because demand for large notes is significantly lower. There are at least four reasons. First, after the 1980s, Sweden’s public intervention to rescue banks – considered one of the most effective among advanced economies – strengthened trust in the banking system. Thus, even during the Global Financial Crisis, when demand for large notes surged elsewhere, the phenomenon did not occur in Sweden.
Second, the demand for anonymity linked to illegal or criminal activities is structurally lower. Third, when banknotes are redesigned, Swedish legislation withdraws old series from circulation, making them less attractive to hold. Fourth, banks have progressively reduced branches, and ATMs have also declined sharply.
The result? Cash has disappeared, and the roughly one million citizens who would still like to use it – mainly in economically or geographically disadvantaged groups – struggle to do so, as retailers refuse it. History’s irony: in 1661, Sweden was the first European state to introduce banknotes.
The Riksbank, Sweden’s central bank, is deeply concerned. The reason is macroeconomic: the less public money exists, the greater the inefficiencies in a range of policies – payments systems, monetary policy, competition policy, consumer protection – as well as in matters of general interest, foremost among them national security.
For this reason, the Riksbank has spent a decade advocating for a digital krona. But its voice goes unheard. The average Swedish citizen is likely unaware – or unconcerned – about the macroeconomic risks that a shortage of public money may generate. And the politicians? The last time they addressed the payments system, they deemed neither the disappearance of cash nor the absence of digital public money to be relevant issues. Two reasons may explain this, and they are not mutually exclusive. If a politician’s objective function is to maximize electoral support, and if citizens do not perceive a problem, then the issue of public money is automatically irrelevant. Additionally, the decline of public money benefits private monies – traditionally issued by banks but now also by non-bank actors, domestic and foreign, including those active in digital finance. The more such private entities can help increase political support, the more plausible it becomes that politicians are “captured” by private interests.
Therefore, if cash declines, digital public money must be created. The complementarity between physical and digital public money was recently emphasized by Piero Cipollone, Executive Board member of the ECB, in relation to the digital euro. Private monies – traditional and innovative, national and foreign – must not monopolize transactions and hold the economy hostage. The risk is already visible in developments across the Atlantic, such as so-called stablecoins, which would be more accurately described as pseudo-stable.
In Sweden, the Riksbank is preaching in the desert. Swedish politicians do not see the problem. Europe’s political leadership must not repeat the same mistake.
To learn more:
- Armelius, H., Claussen, C.A. and Reslow, A. (2020), Withering Cash: Is Sweden Ahead of the Curve or just Special?, Sveriges Riksbank, Working Paper Series, n.393.
- Borestam, A. and Pedersen, M. (2024), The Digital Euro and its Potential Consequences for Sweden, Sveriges Riksbank, Staff Memo, May.
- Burge, A. (2024), Payments that don’t Function in Day-to-Day Life will not Function in a Crisis either, Sveriges Riksbank, Open Forum, April, 25.
- Burge, A. (2025), Legislation Needed to Protect the Status of Cash, Swedish Parliament, Seminar, January, 21.
- Burge, A. (2025), Public-private Sector Cooperation is Key to a Secure, Accessible and Innovative Payments Market, SEB Northern Thoughts Day, February, 12.
- Cipollone, P. (2025), Introductory Statement, Committee on Economic and Monetary Affairs of the European Parliament, Brussels, July, 14.
- Engert, W., Fung, B. and Segendorff, B. (2019), A Tale of Two Countries: Cash Demand in Canada and Sweden, Sveriges Riksbank, Working Paper Series, n.376.
- Khiaonarong, T. and Humphrey, D. (2023), Measurement and Use of Cash by Half the World’s Population, International Monetary Fund, Working Paper Series, n.62.
- Rosl, G., Seitz, F. (2021), Cash Demand in Times of Crises, University of Applied Sciences Amberg-Weden, Discussion Paper Series, n.83.
- Sveriges Riksbank (2023), Consultation Response Regarding The State and Payments, October, 10.
- Sveriges Riksbank (2024), E-Krona Pilot Phase 4, E-krona Report, March.
- Sveriges Riksbank (2025), E-Krona, May, 27.
- Shy, O. (2023), Cash is Alive: How Economist Explain Holding and Use of Cash, Journal of Economic Literature, 61(4), 1465-1520.
- Tarlin, S. (2021), The Future of Cash, Federal Reserve Bank of Philadelphia, Supervision, Regulation, and Credit Department, Discussion Paper Series, n.20-03.
Donato Masciandaro is a Professor of Political Economy at the Bocconi University, where he holds the Intesa Sanpaolo Chair in Economics of Financial Regulation. Since 1989 he has written for the newspaper il Sole 24 Ore. Since 2005, he has contributed to Economia & Management drawing on and developing his comments and analysis published in that economic-financial daily. The ideas expressed in this article are personal and do not reflect the position that the author holds, either permanently or temporarily, in academic or public institutions.
Photo iStock / Nastyaaroma
