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The tiny Nordic country of Norway may not be particularly prominent on the global crypto map. With 22 blockchain solution providers, the nation doesn’t even stand out at regional level.

However, as the race to test and implement Central Bank Digital Currencies (CBDCs) heats up every day, the Scandinavian nation is taking an active stance on its own national digital currency. In fact, it was among the first countries to begin work on a CBDC in 2016.

Deposit money

In recent years, amid an increase in cashless payment methods and concerns over illicit cash transactions, some Norwegian banks have decided to phase out cash options altogether.

In 2016, Trond Bentestuen, then an executive of the major Norwegian bank DNB, proposed to no longer use 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 can only account for 40% of its use. This means that 60% of the use of money is out of control.

A year earlier, 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 came in parallel with Bitcoin (BTC) enthusiasm, like DNB allowed its customers to buy BTC through its mobile app, local courts demanded that convicted drug dealers pay fines in cryptoand local newspapers widely discussed investments in digital assets.

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Last year, Torbjørn Hægeland, executive director for financial stability at Norway’s central bank, Norges Bank, describe the project objective to replace the use of cash in the country:

“In this context, the decline in cash usage and other structural changes in the payment system are the main drivers of the project.”

The experimental phase of the Norwegian CBDC will last until June 2023 and will end with recommendations from the central bank on whether or not 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 functions such as minting, burning, and transferring ERC-20 tokens.

However, the second part of the source code, announced to be made public in mid-September, has not yet been revealed. As specified in a blog postthe initial use of open source code was 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 partners of the alliance”.

Norges Bank in Oslo. Source: Reuters/Gwladys Fouché

Earlier, the bank revealed its main partner in building the infrastructure of the project – Nahmii, a Norwegian 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 Norwegian CBDC testnet is not using the public Ethereum ecosystem, but a private version of the Hyperledger Besu enterprise blockchain.

At the end of 2022, Norway became part of Project Icebreaker, a joint exploration with the central banks of Israel, Norway and Sweden on how CBDCs can be used for cross-border payments. As part of it, 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 specificities, universal problems

In terms of hopes and fears, what among other things defines the Norwegian CBDC project is the national regulatory context. Like its geographical neighbours, 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 funding by shares 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 crypto industry. There are already more than enough problems for tech entrepreneurs in the country, he said in a chat with Cointelegraph:

“Despite the country’s strong infrastructure for entrepreneurs in other sectors, such as low energy costs and free education, these advantages do not extend to the digital realm. The tax burden faced by digital businesses makes it almost 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 tightly as possible, 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 a CBDC could lead to increased regulation and oversight of private stablecoins, which would complicate the operation of these companies.

Speaking to Cointelegraph, Michael Lewellen, head of solutions architecture at OpenZeppelin, a company that is contributing its contract library to the Norges Bank project, doesn’t sound so pessimistic. From a technical point of view, he pointed out, there is nothing preventing private stablecoins from trading and operating alongside CBDCs on public and private Ethereum networks, especially if they use common token standards. and compatible such as ERC-20.

However, from a policy perspective, nothing can prevent central banks from performing financial oversight and enforcing Know Your Customer (KYC) standards, and this is where the CBDC looks like a natural development. Banks will not sit idly by as the blockchain ecosystem grows, as many shadow banking activities take place on-chain, Lewellen clarified, adding:

“CBDCs provide opportunities for central banks to better perform access control and apply KYC rules to CBDC holders, while it is much more difficult to apply the same standards to entities using non-stablecoins. governmental.”

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Could the Norwegian CBDC offer something reassuring in terms of user privacy? This is hardly possible from a technological and strategic point of view, said Lewellen. Today, there is no mature solution that would allow privacy in line with the use of CBDCs.

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