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Source: Сointеlеgrаph

The small Scandinavian country of Norway may not be very prominent on the global crypto map. With 22 blockchain solution providers, the country does not stand out even at the regional level.

However, as the race to test and implement central bank digital currencies (CBDCs) accelerates by the day, the Scandinavian nation is taking a proactive stance on its own national digital currency. In fact, it was one of the first countries to start working on a CBDC back in 2016.

Dropping cash

In recent years, amid the rise of non-cash payment methods and concerns about illegal cash transactions, some Norwegian banks have moved away from cash payment options entirely.

In 2016, Trond Bentestuen, then the head of a major Norwegian bank DNB, proposed to stop using cash as a means of payment in the country:

“Today there are about 50 billion crowns in circulation and [the country’s central bank] Norges Bank accounts for only 40 percent of its use. This means that 60 percent of the use of money is out of control.”

The year before, another major Norwegian bank, Nordea, had also refused to accept cash, leaving only one branch at Oslo Central Station to continue handling cash.

This sentiment has paralleled the bitcoin (BTC) enthusiasm as DNB has allowed its customers to buy BTC through its mobile app, local courts have required convicted drug dealers to pay their fines in cryptocurrency, and local newspapers have widely discussed investing in digital assets.

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Last year Thorbjørn Hegeland, executive director of financial stability at Norway’s central bank, Norges Bank, outlined the goal of the project to replace the use of cash in the country:

“Against this backdrop, reducing the use of cash and other structural changes to the payment system are key drivers for the project.”

The experimental phase of the Norwegian CBDC will last until June 2023 and will end with the central bank’s recommendations on the need to implement a prototype.

Ethereum is the key

In September 2022, Norges Bank released an open source code for an Ethereum-backed digital currency sandbox. The sandbox, available on GitHub, offers an interface for interacting with the testnet, including features such as creating, burning, and transferring ERC-20 tokens.

However, the second part of the source code, the release of which was announced by mid-September, has not yet been disclosed. As stated in the blog post, the initial use of open source was not “a signal that the technology will be based on open source” but “a good starting point for learning as much as possible in collaboration with developers and alliance partners.”

Norges Bank in Oslo. Source: Reuters/Gwladys Fouche.

Earlier, the bank disclosed information about its main infrastructure partner for the project, the Norwegian company Nahmii, which developed the eponymous layer 2 scaling solution for Ethereum. The company has been working on this Ethereum scaling technology for several years and has its own network and tokens. At the moment, the testnet for the Norwegian CBDC does not use the public Ethereum ecosystem, but a private version of the Hyperledger Besu enterprise blockchain.

At the end of 2022, Norway became part of the Icebreaker project, a joint study with the central banks of Israel, Norway and Sweden on how CBDC can be used for cross-border payments. Within its framework, the three central banks will connect their internal CBDC proof-of-concept systems. The final report on the project is scheduled for the first quarter of 2023.

Local specifics, general problems

In terms of hopes and fears, what defines the Norwegian CBDC project is, among other things, the national regulatory context. Like its geographic neighbors, Norway is known for its cautious approach to the digital asset market, high taxes, and the relatively small scale of its domestic crypto ecosystem – a recent study by the EU Blockchain Observatory estimated its total equity funding at a modest $26.9 million.

Norwegian serial entrepreneur Sander Andersen, who recently moved his fintech company to Switzerland, doubts that the upcoming project will peacefully coexist with the crypto industry. There are already more than enough problems for tech entrepreneurs in the country, he said in a chat with :

“Despite the country’s strong infrastructure for entrepreneurs in other industries, such as low energy costs and free education, these benefits do not extend to the digital realm. The tax burden faced by digital companies makes it virtually impossible to compete with businesses based in more business-friendly jurisdictions.”

Since central bank digital currencies can compete with private cryptocurrencies, and the goal of any government is to control financial transactions as tightly as possible, Andersen does not see Norway among the exceptions:

“The 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 CBDC could lead to increased regulation and oversight of private stablecoins, making it difficult for these companies to operate.”

Speaking to , Michael Levellen, head of solution architecture at OpenZeppelin, the company contributing its contract library to the Norges Bank project, doesn’t sound so pessimistic. He stressed that from a technical standpoint, there is nothing stopping private stablecoins from trading and operating alongside CBDCs on both public and private Ethereum networks, especially if they use common, interoperable token standards such as ERC-20.

However, from a policy standpoint, nothing can stop central banks from exercising control over financial transactions and enforcing Know Your Customer (KYC) standards, and this is where CBDC looks like a natural development. Banks will not sit idly by as the blockchain ecosystem grows as there is a lot of shadow banking going on on the network, Levellen elaborated, adding:

“CBDCs offer central banks the ability to better monitor and enforce KYC rules for CBDC holders, while applying the same standards to entities using non-government stablecoins is much more challenging.”

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Can the Norwegian CBDC offer anything reassuring in terms of user privacy? According to Lewellen, this is hardly possible from both a technological and a strategic point of view. Today, there is no mature solution that provides the privacy required to use a CBDC.

Any national digital currency will almost certainly require each address to be associated with an identity, using KYC and other means that we see in banks today. In fact, if done on a private ledger, such as the one Norges Bank is currently testing, CBDC will offer not only less privacy for a single client, but at the same time less openness to the public regarding blockchains.

Source: Сointеlеgrаph

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