Yesterday Norges Bank shared the results of the fourth phase of its central bank digital currency (CBDC) experiments. It doesn’t believe there is currently a need for a retail CBDC but clarified which conditions might trigger a decision. Given that tokenized deposits could provide an alternative to a retail CBDC, it will now explore a wholesale CBDC, for interbank settlement of tokenized deposits.
The fifth phase will run until the end of 2025 when the central bank management will have the tools to decide whether or not to proceed to launch a CBDC.
Deliverables for stage 5 include:
- fundamental CBDC requirements
- requirements specification – functional, technical, security
- regulations
- a launch plan.
The above is for a retail CBDC. Additionally, there will be a similar report for wholesale CBDC to support tokenized deposits and DLT securities settlement.
Conditions that might trigger a CBDC launch
Norges Bank is concerned about the risks of currency substitution and reduced national control over payment systems. That might happen if there is widespread adoption of cryptocurrencies, including foreign currency stablecoins. Alternatively, there’s the threat of BigTech payments, with or without stablecoins. Or Norwegians could adopt the digital euro CBDC.
Even in that scenario, a retail CBDC would only be needed if the private sector doesn’t provide an alternative enabling programmable functionality, such as tokenized deposits.
Despite mentioning the digital euro as a risk, the Norges Bank paper also considers the possibility of using the digital euro infrastructure for its own CBDC. The topic of using Europe’s TARGET payment system is also mentioned. The paper concludes.”a large part of the core of the Norwegian payment system would then be dependent on one and the same actor.”
Norges Bank considered the digital euro infrastructure because it views developing its own CBDC infrastructure as too big a task, even in collaboration with suppliers.
It believes current off-the-shelf CBDC solutions won’t match its needs. However, by the time the phase 5 reports are delivered, it hopes more mature and suitable off-the-shelf offerings will be available.
Conclusions from testing CBDC technology
The central bank published a separate report covering the phase 4 technology tests.
Its primary testing platform was a permissioned version of Ethereum, Hyperledger Besu. It also spent some time testing openCBDC, the MIT solution used in Project Hamilton. In general, it said the technology is available to serve its needs. However, it believes it is too early to make technological decisions. Plus, it still needs to do more testing on privacy, scalability and security.
One of the more distinctive aspects of the trials was the interest in exploring multiple blockchains or ledgers. It believes different technologies will be needed for various applications. These might include programmability, mass payments, machine-to-machine (M2M) payments and offline payments.
Hence, it tested swaps and bridges between different blockchain technologies, including IOTA. It didn’t use the public IOTA DLT but tested bridging between Ethereum and IOTA technologies. That’s particularly because IOTA uses the UTXO token format, whereas Ethereum’s tokens are account-based.
The paper uses the terms ‘register’ and ‘ledgers’ interchangeably. “In principle, it is also imaginable that a CBDC can be transferred to private registers (using a bridge), including decentralised registers, even if this raises some issues,” says the report.
Additionally, the central bank published a separate paper exploring the liquidity impact of a CBDC on banks and monetary policy.
