The tiny Scandinavian country of Norway may not be particularly noticeable on the global crypto map. With 22 blockchain solution providers, the nation does not even stand out on a regional level.
However, with the pace of testing and implementation of central bank digital currencies (CBDCs) accelerating every day, the Scandinavian country is taking an active stance on its national digital currency. In fact, it was among the first countries to start working on CBD back in 2016.
In recent years, amid a rise in cashless payment methods and concern about illegal cash-enabled transactions, some Norwegian banks have moved to remove cash options altogether.
In 2016, Trond Bentestuen, then an executive at the main Norwegian bank DNB, suggested stopping the use of cash as a method of payment in the country:
Today, there are approximately 50 billion crowns in circulation and [the country’s central bank] The Bank of Norway can only account for 40 percent of its use. This means that 60 percent of the use of funds is beyond any control.”
A year earlier, another large Norwegian bank, Nordea, had refused to accept cash, leaving only one branch at Oslo Central Station to continue handling cash.
The sentiment ran parallel to Bitcoin (BTC) enthusiasm, as DNB made it possible for its customers to buy BTC via its mobile app, local courts required convicted drug dealers to pay their fines in cryptocurrency, and investments in the digital asset were widely discussed in local newspapers.
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Last year, Torbjørn Hægeland, Executive Director of Financial Stability at Norway’s central bank, Norges Bank, outlined the project’s goal of replacing cash use in the country:
“With this background, the decrease in the use of cash and other structural changes in the payment system are the main drivers of the project.”
The experimental phase of Norges Bank’s coins will run until June 2023 and end with recommendations from the central bank on whether a prototype implementation is necessary.
Ethereum is the key
In September 2022, Norges Bank released an open source sandbox code for the Ethereum-backed digital currency. The Sandbox, available on GitHub, is designed to provide an interface for interacting with the testnet, enabling functions such as minting, burning, and transferring ERC-20 tokens.
However, the second part of the source code, which was announced to be released to the public by mid-September, was not disclosed. As specified in the blog post, the initial use of open source code was not “an indication that the technology will be based on open source code”, but “a good starting point for learning as much as possible in collaboration with developers and alliance partners”.
Earlier, the bank revealed its main partner in building the infrastructure for the project — Nahmii, a developer in Norway of the Layer 2 scaling solution for Ethereum of the same name. The company has been working on this scaling technology for Ethereum for several years now and has its own network and tokens. At this point, the Norwegian CBDC testnet is not using the public Ethereum ecosystem, but a private version of the organization’s Hyperledger Besu blockchain.
In late 2022, Norway becomes part of Project Icebreaker, a joint exploration with the central banks of Israel, Norway and Sweden of how CBDCs can be used for cross-border payments. Under it, the three central banks will link up local proof-of-concept CBDC systems. The final report of the project is scheduled to be released in the first quarter of 2023.
Local details, global problems
In terms of hopes and fears, what defines the Norwegian CBDC project among others is the national regulatory context. Norway, like its geographic neighbors, is known for its cautious approach to the digital asset market, with high taxes and relatively small scope for its domestic crypto system — a recent study by the European Union’s Blockchain Observatory estimated its total equity funding at $26.9 million. .
Norwegian serial entrepreneur Sander Andersen, who recently moved his fintech company to Switzerland, doubts that the upcoming project will coexist peacefully with the cryptocurrency industry. There are already more than enough problems for tech entrepreneurs in the country, he said in a conversation with Cointelegraph:
“Despite the country’s strong infrastructure for entrepreneurs in other industries, such as lower energy costs and free education, these benefits do not extend to the digital realm. The tax burden faced by digital companies makes it nearly impossible to compete with companies based in more favorable jurisdictions. for business.”
Since central bank digital currencies have the potential to compete with private cryptocurrencies, and the goal of any government is to control financial transactions as closely as possible, Andersen does not see Norway as an exception:
“Norwegian Central Bank’s CBDC project could also pose a threat to the legal status of private stablecoins in the country. The introduction of a central bank digital currency could lead to increased regulation and oversight of private stablecoins, making it more difficult for these companies to operate.”
Speaking to Cointelegraph, Michael Llewellyn, Head of Solutions Architecture at OpenZeppelin, a company that contributes its contract library to the Norges Bank project, doesn’t seem too pessimistic. He emphasized that, from a technical perspective, there is nothing preventing private stablecoins from trading and operating alongside central bank coins on both public and private Ethereum networks, especially if they use common and compliant token standards such as ERC-20.
However, from a policy perspective, there is nothing that can stop central banks from performing fiscal guarding and enforcing Know Your Customer (KYC) standards, and this is where CBDCs seem like a natural progression. Banks will not stand idly by as the blockchain ecosystem grows, as there is a lot of shadow banking activity happening on-chain, Llewellyn outlined, adding:
“CBFs offer central banks the ability to do better gatekeeping and KYC enforcement on digital currency holders, while it is more challenging to impose the same standards on entities using non-government stablecoins.”
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Any national digital currency would almost certainly require each address to be associated with an identity, using KYC and other means we see in banks today. In fact, if it were conducted on a private ledger, such as the one Norges Bank is currently testing, a CBDC would not only provide less privacy for a single customer, but at the same time less public transparency regarding the blockchain.