The small Nordic country of Norway may not be prominent on the global crypto map. With 22 blockchain solution providers, the country is not visible at the regional level.
However, as the race to test and implement central bank digital currencies (CBDCs) accelerates every day, Scandinavian countries are taking an active stance on their own national digital currencies. In fact, it was one of the first countries to start working on a CBDC in 2016.
Drop the cash
In recent years, amid the rise of cashless payment methods and concerns about illegal transactions using cash, some Norwegian banks have moved to remove all cash options.
In 2016, Trond Bentestuen, then an executive at Norway’s main bank DNB, proposed to stop using cash as a means of payment in the country:
“Today, there are about 50 billion kroner in circulation and [the country’s central bank] Norges Bank can only account for 40 percent of its use. That means 60 percent of the use of money is out of control.
A year before that, another big Norwegian bank, Nordea, also refused to accept money, leaving only one branch in Oslo Central Station to continue handling cash.
This sentiment is in line with the spirit of Bitcoin (BTC), as DNB allows customers to buy BTC through mobile applications, local courts demand that accused drug dealers pay their fines in crypto, and local newspapers widely discuss investments in digital assets.
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Last year Torbjørn Hægeland, executive director of financial stability at Norway’s central bank, Bank Norges, outlined the goal of the project to change the use of cash in the country:
“With this background, the decline in the use of cash and other structural changes in the payment system are the main drivers for the project.”
The experimental phase of the Norwegian CBDC will last until June 2023 and will end with a recommendation from the central bank on whether the implementation of the prototype is necessary.
Ethereum is the key
In September 2022, Norges Bank released the open source code for its Ethereum-powered digital currency sandbox. Available on GitHub, the sandbox is designed to offer an interface to interact with the test network, enabling functions like printing, burning and transferring ERC-20 tokens.
However, the second part of the source code, which was announced to be public in mid-September, has not been revealed. As stated in the blog post, early use of open source code is not “a signal that the technology will be based on open source code,” but “a good starting point to learn as much as possible in collaboration with developers and alliance partners.”
Earlier, the bank announced its main partner in building the infrastructure for the project – Nahmii, a Norwegian developer of a layer-2 scale solution for Ethereum of the same name. The company has been working on this scale technology for Ethereum for years and has its own network and token. At this point, the test network for the Norwegian CBDC does not use the public Ethereum ecosystem, but a private version of the company’s blockchain Hyperledger Besu.
By the end of 2022, Norway will be part of Project Icebreaker, a joint exploration with the central banks of Israel, Norway and Sweden on how CBDC can be used for cross-border payments. In their framework, the three central banks will connect the domestic proof-of-concept CBDC system. The final report for the project is scheduled for the first quarter of 2023.
Local specifics, universal problems
In terms of hopes and fears, what defines the Norwegian CBDC project among others is the national regulatory context. Like its geographical neighbors, Norway is known for its cautious approach to the digital asset market, with high taxes and the relatively small scale of the domestic crypto ecosystem – a recent study by the EU Blockchain Observatory estimates total equity funding at $26.9 million.
Norwegian serial entrepreneur Sander Andersen, who recently moved his fintech company to Switzerland, doubts that his upcoming project will coexist peacefully with the crypto industry. There are 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 low energy costs and free education, these benefits do not extend beyond the digital realm. The tax burden faced by digital companies makes it almost impossible to compete with businesses based in more business-friendly jurisdictions.
As central bank digital currencies have the potential to compete with private cryptocurrencies, and the goal of any government is to tightly control financial transactions, Andersen does not see Norway among the exceptions:
“The Norwegian central bank’s CBDC project may also pose a threat to the legal status of private stablecoins in the country. The introduction of CBDC may increase the regulation and supervision of private stablecoins, making it more difficult for these companies to operate.
Speaking to Cointelegraph, Michael Lewellen, head of solution architecture at OpenZeppelin, the company that contributed the contract library to the Bank Norges project, was not pessimistic. From a technical perspective, he stressed, there is nothing stopping private stablecoins from trading and operating alongside CBDC on the public and private Ethereum network, especially if they use a common and compatible token standard such as ERC-20.
However, from a policy point of view, there is nothing to prevent central banks from conducting financial gatekeeping and implementing Know Your Customer (KYC) standards, and here CBDC seems like a natural development. Banks will not stand still as the blockchain ecosystem grows, as there is a lot of shadow banking activity happening on the chain, Lewellen pointed out, adding:
“CBDCs offer central banks the ability to perform better gatekeeping and enforce KYC rules on CBDC holders, while applying the same standards to entities using non-governmental stablecoins is more challenging.”
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Can Norway’s CBDC guarantee users’ privacy? It’s impossible from a technological and strategic standpoint, Lewellen said. Currently, there are no mature solutions that allow for privacy in a way that is relevant to the use of CBDC.
Any national digital currency will always require every address to be linked to an identity, using KYC and the like we see in banks today. In fact, if it is implemented in a private ledger, as Bank Norges is currently doing, the CBDC will provide not only less privacy for one customer, but at the same time less public transparency about blockchains.