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Norges Bank, the Norwegian central bank, has said in its Financial Infrastructure 2022 report that the testing phase for its central bank digital currency (CBDC) will run until 2023, while also joining international colleagues in calling for more crypto regulation.
Norway is widely regarded as being one of the most cashless societies on earth, while VIXIO analysis also shows the country tops the Nordic region in terms of usage of digital payments.
These two factors, alongside the emergence of new private crypto-assets, have motivated Norges Bank, like many of its global counterparts, to test the digital form of the Norwegian kroner to preserve its monetary sovereignty, promote financial stability and support an efficient payment system.
The CBDC testing will involve the issuance, distribution and, as the Norges Bank says, destruction of the digital token after use.
This phase will last until Summer 2023, which will provide valuable insights for Norges Bank to validate whether the technologies deployed during the testing provide a safe, secure, efficient and resilient payment system.
Financial institutions, payment service providers, fintechs and technology service providers will be invited to participate in the sandboxes or hackathons as part of the CBDC experiment.
Real money, however, will not be used in the testing.
Instead, money will be represented by Ethereum tokens which will be reflected as balances on registered addresses using cryptography technology.
One of the prototype infrastructures being considered is based on a private version of the enterprise blockchain, Hyperledger Besu, as layer one.
The testing will also include layer two blockchain protocols to achieve scalability. This layer will also serve as a link between different ledgers.
Norges Bank plans for the prototype infrastructure to be made available as open source code in the summer.
Using an open source code will enable complementary software to be developed, such as digital wallets, privacy solutions, analytical tools and systems for regulatory compliance.
According to the central bank, this would be able to facilitate developers, alliance partners and interested parties to participate more broadly in the CBDC testing.
It should not be seen as a signal that the technology for a digital Norwegian kroner will ultimately be based on open source code, Norges Bank cautioned.
However, it is considered a good starting point for learning to engage with partners and the public, and to enable Norges Bank to carry out its CBDC experiments.
Norges Bank said it will seek to draw on the experiences from CBDC testing and work conducted by other central banks and international organisations. For example, it noted that international initiatives focused on cross-border payments have been useful for providing standardisation.
Cross-border payments are one of the issues that the central bank appears most concerned about.
“If the public in one country has access to a CBDC in another, financial and economic conditions could be affected in both countries, particularly if there is uncertainty about the financial position of the banking sector in the first country,” the report says, adding that it is important to include potential cross-border effects when assessing a CBDC in Norway and the possible impact in Norway if CBDCs are introduced in other advanced economies.
Reducing risks of crypto-assets
The CBDCs' work comes at the same time as the central bank calls for tighter regulatory requirements on crypto-assets.
“Regulation can promote responsible innovation that contributes to both realising gains and to reducing risk,” the report says, adding that for many types of regulation, international coordination and cooperation will be necessary to achieve desired effects.
In other areas, national regulations may be more appropriate for addressing national priorities and needs, Norges Bank pointed out, stating that it is working both internationally and domestically on regulation in this field.
In particular, Norges Bank has focused its crypto-asset work on energy consumption and the Ukraine conflict.
Unlike its regulatory peers in Sweden, who have advocated for a ban, Norges Bank appears to have remained on the fence when it comes to the energy consumption issue of crypto-assets, such as Bitcoin.
“Basically, it is the market's role to allocate resources. This also applies to resources that are used to validate cryptocurrency transactions,” the report says.
However, various forms of market failure can prevent markets from allocating resources so that they provide the greatest possible benefit to society, Norges Bank said, pointing out that cost-benefit analysis can shed more light on the regulation of validation methods.
Through this analysis, consideration should be given to whether any gains from cryptocurrencies can be achieved with less energy-intensive methods, Norges Bank advises. “In general, it can be demanding to compare the societal benefits of different purposes of electricity consumption.”
Meanwhile, the central bank confirmed that the role of crypto-assets in the Ukraine conflict is something they are closely monitoring and will help it decide on how best to regulate the sector.
Although Norges Bank has acknowledged that crypto could be used to circumvent sanctions, it said that “there are a number of interfaces between the war in Ukraine and crypto-assets”.
For example, both Ukrainian authorities and volunteer organisations have permitted the use of crypto-assets to support both military and civilian operations.
This includes direct crypto-asset donations but also the use of crypto-asset systems for, among other things, the issuance of non-fungible tokens to fund military and civilian activity.
Exploring real-time payments usage
Norges Bank also used its infrastructure report to stress the importance of expanding real-time payments in the country to a wider set of use cases. Currently, instant payments primarily support peer-to-peer (P2P) payments.
“Banks and other market participants should develop and offer new real-time payment services for businesses and the public sector,” the central bank advocated.
For example, it advocates the use of real-time payments to support in-store payments and other payment types that are currently predominantly made using payment cards.
Meanwhile, the central bank also talked up the possibility of allowing itself a larger role in the payment system to support the development of instant payments.
“Banks have different needs, priorities and strategies related to ICT projects ahead and differing views as to the urgency of establishing new real-time services,” the report says. “In addition, payment services have become a competitive arena, among banks as well as between banks and other operators.”
According to Norges Bank, this may weaken the incentive to develop a common underlying infrastructure.
The extent to which banks — by changing, adapting and developing their own systems and solutions — will make use of the possibilities provided by NICS Real, the country’s instant payment system, is uncertain, Norges Bank said.
Therefore, it is considering expanding its role in real-time payments. This would mean establishing a new system for real-time payment settlement operated by Norges Bank that would partially or fully replace the functions performed by NICS Real at present.
The system could also be designed for immediate settlement of real-time payments in central bank money 24 hours a day.
As the system owner, Norges Bank would be able to take a coordinating and unifying role in getting banks to use the existing and future functionalities offered by TIPS.
At the same time, developing retail real-time payment services will remain the domain of banks and other operators.
For example, establishing real-time payment solutions for the corporate market may require adaptations and further development by businesses and their financial system providers.
“It is nonetheless Norges Bank’s view that the use of common standards and the predictability provided by participation in TIPS may stimulate banks and other operators to provide real-time retail payment services,” the central bank acknowledged.
