Due to cash decline in the country and the development of technology, the Central Bank of Norway considers launching its own cryptocurrency to dynamize the Norwegian financial system.
The advanced nation of Norway could be the first ever country in the world to launch its own cryptocurrency.
The popularity of Bitcoin has gathered much interest from financial institutions and the public around the world. Still, Bitcoin remains a novelty for many. However such technology and cryptocurrencies, in general, could impact the economies in a wider purpose as stated by the Bank of Canada. Alongside the UK and Canada, Norway is today considering launching a Central Bank Digital Currency (CBDC), redefining the purpose of the banking system in a modernized, digital-based world.
Why is Norway considering introducing its own cryptocurrency? What could be the consequences for the financial institutions, the public, and the economy as a rule? Would that imply that cash could disappear in the long term?
What are the motivations ofNorwayy to launch its own cryptocurrency?
Norway is a modern, technologically advanced nation with forward-thinking citizens and organizations as seen in the sectors of education and healthcare. With the highest standard of living in the world, the richest of the Scandinavian countries could be the first country ever to launch its own Central Bank Digital Currency (CBDC).
One of the motivations of the Norges Bank, the Central Bank of Norway, behind the introduction of a cryptocurrency is to boost confidence in the monetary system and the financial institution. As highlighted by the report of the Norges Bank, “confidence in the monetary system means that we trust that the value of money will remain stable over time.”
Today’s economy has changed and some trends in the payment system have emerged. Because of gradual cash usage decline today in the country, which now totals around 10 to 15 % of payments for which cash could be used according to the report, the Norges Bank envisions that issuing its own cryptocurrency could be the next step toward re-establishing trust in the monetary system.
Norway isn’t alone as cash decline also occurred in the UK and Canadian economies, and today the Bank of Canada is further considering launching its own cryptocurrency as a response.
What could be the assets of developing a cryptocurrency?
Cash decline is one of the reasons behind the introduction of a CBDC in Norway. Source: NORGES BANK PAPERS 2018
Introducing a CBDC in Norway would complete cash as a means of payment and store of value, and banks will still emit credit as usual. The purpose isn’t to eliminate cash from the economy. People, banks, and organizations will still use cash for years to come. Therefore, cash supply should be motivated by demand, states the report.
The state-backed digital currency would target the general public in Norway such as citizens, organizations, non-financial enterprises and government authorities. Norway believes that launching its own cryptocurrency could enhance its monetary infrastructure and boost extra confidence in the monetary system. But as no country in the world has ever introduced its own cryptocurrency, Norway lacks of international experience to draw on.
The two other implications of introducing a CBDC are to be an independent backup solution for the ordinary payment systems and to ensure the existence of suitable legal tender as a supplement to cash.
What are the desired attributes of the payment system?
The traditional purpose of money is as follow:
- Physical payment
- Store of value
- Unit of accounting
These are the current trends in the Norwegian economy:
- Cash usage is decreasing
- Card usage is increasing
- Other means of payment gain popularity (Giro, Bitcoin)
Introducing the digital currency should address the above and respond to the needs of the people, in terms of legitimacy and user acceptance. Hence, the author of the report highlights that: “It is too early to conclude whether Norges Bank should take the initiative in introducing a CBDC. The impacts of a CBDC — and the socio-economic cost-benefit analysis — will depend on the specific design of the cryptocurrency.”
What could be the consequences of introducing a new currency?
The first consequence would be innovation. The introduction of a new means of payment such as a CBDC may improve the efficiency of the payment system—through new financial products and services on offer and through intensified competition in the market. Institutions could also enter the “innovation race” and therefore reshape the traditional payment system.
On a macroeconomic level, the way banks and central bank report their financial operations could change i.e. balance sheets. Currently, notes and coins i.e. physical money represent the only claim the public can have against the central bank. A CBDC would give households and businesses a digital claim against the central bank, and therefore, the conversion of bank deposits into CBDC units change how central bank report on the balance sheets.
ARE CITIZENS, BANKS, AND THE ACTORS OF THE ECONOMY READY TO MOVE AWAY FROM CASH?
Banks still need cash as much as citizens and organizations. Cash has great attributes such as non-traceability and is also technology independent and risk-free. Cash usage provides further benefits. Everyone can use it so mass adoption isn’t required. Usage of cash is anonymous, which isn’t the case of the cryptocurrencies as blockchain technology enables traceability.
Today, in most countries, bank deposits are the predominant forms of payments. “E-money and crypto-assets are hardly viable alternatives in the near and medium term”, the report states. However, some points the downsides of holding cash such as the risk of being stolen or lost. On the latter, digital cryptocurrencies could be a great response but are not away of being hacked either.
The richest of the Scandinavian nation that is Norway seems to be open to the world of digital currency and blockchain. But since no country has launched a central digital currency yet and studied its consequences on a micro and macroeconomic level, Norway is still considering what the assets of the cryptocurrency could bring to its economy, financial systems, and the public. If the nation supports the regulation of the CBDC and defines its purpose well while communicating its benefits to citizens, banks, and organizations clearly, then perhaps the challenge is worth taking as long as there’s a demand for the CBDC.
Also published on Medium.