As Norway continues to embrace digitalisation in all facets of life, Norges Bank is exploring whether to introduce a digital currency. Here's what that means.
Should an official central bank digital currency (CBDC) be part of the future Norwegian financial landscape? That's what Norway's central bank is pondering right now, but they're in no rush to make a decision.
This initiative could see the creation of a digital form of cash, a move that could transform the way individuals and businesses interact with money.
It's not as far-fetched as it seems. Many residents in Norway, including me, almost never carry cash thanks to the widespread adoption of mobile payment solutions in Norway.
Norges Bank is not alone. A number of central banks around the world are looking at blockchain as a possible mechanism to issue the digital currencies of the future.
What Is a Central Bank Digital Currency?
A central bank digital currency is essentially a digital version of cash, issued by a central bank like Norges Bank.
In Norway today, money comes in two forms: central bank money (physical cash like notes and coins) and deposit money (the funds held in your bank account).
While cash still plays a vital role in Norway's payment systems, its usage has been steadily declining. This has prompted Norges Bank to consider a digital alternative.
The proposed CBDC would function similarly to physical cash, providing Norwegians with a digital claim backed by the government.
As with traditional money, it would likely be used across the same platforms people already use for electronic payments, including person-to-person transfers, online purchases, and in-store transactions.
Norges Bank has been investigating CBDCs since 2016, carefully assessing the risks, benefits, and technical challenges. As the investigation continues, the bank remains focused on creating a more secure and efficient payment system that’s prepared for future demands.
Why Is a CBDC Being Considered?
Several factors have led to the consideration of a digital currency. First, Norway has one of the lowest cash usage rates in the world, with more and more transactions moving online.
However, cash still plays a crucial role in ensuring payment system resilience during crises.
As the world becomes more digital and interconnected, there’s growing concern about vulnerabilities, such as cyber-attacks or technical failures that could disrupt payment systems.
A CBDC could serve as a digital contingency arrangement, operating independently of current banking systems.
It could also provide a platform for innovation in Norway's payment services, reducing the risks posed by new global players like cryptocurrency platforms or tech giants that dominate the financial landscape.
Additionally, a digital currency could improve cross-border payments, making transactions faster and less costly.
What Are the Next Steps?
Norges Bank’s research has examined the potential impacts of a CBDC on financial stability, banking operations, and monetary policy.
The bank is also investigating the technological requirements, having tested prototypes based on blockchain technology, similar to that used by cryptocurrencies like Bitcoin.
However, it’s important to note that a CBDC differs from cryptocurrencies as it is state-backed and carries no volatility in value.
Before a CBDC could be implemented, several legislative changes would be required, and the ultimate decision will lie with the Norwegian Parliament, the Storting.
Norges Bank plans to complete its assessment by the end of 2025, which will form the basis for recommendations on whether to introduce a CBDC and what form it might take.
Addressing Concerns
Norges Bank has also taken potential drawbacks into account, particularly concerns about privacy and surveillance.
In a centralized digital system, there is the risk that CBDCs could be used to monitor individuals' financial transactions.
However, Norges Bank emphasizes that any CBDC implemented in Norway would be firmly rooted in democratic principles, with strict limitations on data collection to protect individual privacy.
The Global Picture
Norway is not alone in exploring digital currencies. Central banks worldwide are conducting similar investigations, with only a handful of countries—none in Europe—having introduced a CBDC for public use.
Norges Bank has collaborated with international partners, including central banks in Sweden and Israel, to test prototypes for cross-border transactions.
The introduction of a central bank digital currency could significantly change how payments are made in Norway, offering a secure, efficient, and innovative alternative to both cash and commercial bank money.
While the decision is still some time away, Norges Bank’s ongoing investigation will be vital in ensuring that the country’s financial system remains robust, adaptable, and secure for years to come.
