The small Nordic country of Norway may not be particularly notable on the global crypto map. With its 22 blockchain solution providers, the nation does not stand out even on a regional level.

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

drop cash

In recent years, amid a rise in cashless payment methods and concerns about illicit cash-enabled transactions, some Norwegian banks have moved to remove cash options altogether.

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

“Today, there are approximately 50 billion crowns 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 earlier, another large Norwegian bank, Nordea, had also refused to accept cash, leaving only one branch in Oslo Central Station to continue handling cash.

This sentiment came in parallel with the enthusiasm for Bitcoin (BTC), as DNB allowed its customers to buy BTC through its mobile app, local courts required convicted drug dealers to pay their fines in cryptocurrency, and local newspapers discussed investments in digital assets widely.

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Last year, Torbjørn Hægeland, executive director of financial stability at Norway’s central bank, Norges Bank, described the project’s goal of replacing the use of cash in the country:

“With this background, the decrease in the use of cash and other structural changes in the payment system are key factors for the project.”

The pilot phase of the Norwegian CBDC will last until June 2023 and will end with recommendations from the central bank on whether a prototype implementation is necessary.

ethereum is the key

In September 2022, Norges Bank released the open source code for the Ethereum-backed digital currency sandbox. Available on GitHub, the sandbox is designed to provide an interface for interacting with the testnet, enabling features like minting, burning, and transferring ERC-20 tokens.

However, the second part of the source code, which was announced to be released in mid-September, has yet to be revealed. As specified in a blog post, the initial use of open source code was not a “signal that the technology will be based on open source code”, but rather a “good starting point to learn as much as possible in collaboration with developers and alliance partners.”

Norges Bank in Oslo. Source: Reuters/Gwladys Fouche

Earlier, the bank revealed its lead partner in building the infrastructure for the project: Nahmii, a Norway-based developer of a Layer 2 scaling solution for Ethereum of the same name. The company has been working on this scaling technology for Ethereum for several years and has its own network and tokens. At this point, the testnet for the Norwegian CBDC does not use the public Ethereum ecosystem, but a private version of the Hyperledger Besu enterprise blockchain.

In late 2022, Norway became part of Project Icebreaker, a joint exploration with the central banks of Israel, Norway, and Sweden into how CBDCs can be used for cross-border payments. Under its framework, the three central banks will connect their national proof-of-concept CBDC systems. The final project report is scheduled for the first quarter of 2023.

Local particularities, universal problems

In terms of hopes and fears, what defines the Norwegian CBDC project, among others, is the national regulatory context. Like its geographic neighbors, Norway is known for its cautious approach to the digital asset market, with high taxes and the relatively small scale of its national crypto ecosystem: a recent study by the EU Blockchain Observatory estimated its total capital 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 coexist peacefully with the cryptocurrency industry. There are more than enough problems for tech entrepreneurs in the country already, 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 to the digital realm. The tax burden digital companies face makes it nearly impossible to compete with companies 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 control financial transactions as strictly as possible, Andersen does not see Norway as an exception:

“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 a CBDC may lead to increased regulation and supervision of private stablecoins, making it more difficult for these companies to operate.”

Speaking to Cointelegraph, Michael Lewellen, head of solutions architecture at OpenZeppelin, a company that is contributing its library of contracts to the Norges Bank project, does not seem so pessimistic. From a technical perspective, he stressed, there is nothing preventing private stablecoins from trading and operating alongside CBDCs on public and private Ethereum networks, especially if they use common compliant token standards like ERC-20.

However, from a political perspective, there is nothing that can stop central banks from conducting financial surveillance and enforcing Know Your Customer (KYC) standards, and this is where CBDC seems a natural development. Banks will not sit idly by as the blockchain ecosystem grows, as there is a lot of shadow banking on-chain, Lewellen specified, adding:

“CBDCs offer central banks the ability to better perform surveillance and enforce KYC rules on CBDC holders, while enforcing the same standards against entities using non-government stablecoins is much more challenging.”

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Could the Norwegian CBDC offer something reassuring in terms of user privacy? It’s almost impossible from a technological and strategic standpoint, Lewellen said. Today, there is no mature solution that enables privacy in a way that is compatible with the use of CBDCs.

Any national digital currency will almost certainly require each address to be linked to an identity, using KYC and other means we see in banks today. In fact, if done on the private ledger, like the one Norges Bank is testing right now, the CBDC will offer not only less privacy for a single customer, but also less public transparency regarding blockchains.

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