For the cryptocurrency issue of Nordea On Your Mind, Nordea Thematics’s Johan Trocmé (JT) spoke to Ida Wolden Bache (IWB), Deputy Governor of Norges Bank. She discusses the Norwegian central bank’s ongoing research into the launch of a digital krone, how central bank digital currencies differ from crypto and the trade-off between privacy and crime prevention.
JT: The Nordic countries stand out internationally in digital payments, with very limited use of cash for transactions. What do you think are the key drivers behind this? Do you expect the COVID pandemic to be a lasting catalyst for other regions to catch up and reduce their use of cash for payments?
IWB: The Nordic countries were early adopters of digital solutions such as payment cards and internet banking. Access to PCs, tablets and smart phones with payment apps is now widespread. Most physical shops offer payments by cards and mobile apps. Internet shopping has increased further during the COVID pandemic, and payment solutions have become more user-friendly. People seem to welcome the accessibility and convenience of digital payments. The pandemic has accentuated the development towards digital payments. However, the use of cash was already quite low in the Nordics before the pandemic, so I guess the potential for change is greater in other regions.
JT: Do you think cryptocurrencies are a viable alternative for digital payments? Is there a strong use case for them? Do you see a need for today’s cryptocurrencies to be regulated?
IWB: First of all, it is important to note that there are fundamental differences between cryptocurrencies and currencies issued by central banks and commercial banks. Most importantly, cryptocurrencies are not a claim on an institution, and there is no central bank backing and stabilising the currency.
Cryptocurrencies offer opportunities for innovation, for example related to programmability. At the same time, they pose a number of challenges – both as a currency, as a means of payment and a payment system. A simple question about how much a cup of coffee costs may have a complicated answer. Prices must be quoted in several currencies, and customers and merchants must agree on which currency should be used in the transaction. Wide exchange rate fluctuations can make this particularly demanding. Even with one cryptocurrency in the private sector, those with income in cryptocurrency would still have to pay taxes in the national currency, and would hence be exposed to an exchange rate risk. If the new currency offers superior user-friendliness without excessive exchange rate fluctuations, such disadvantages may not carry sufficient weight. However, so far the most adopted cryptocurrency infrastructures have not been suitable for retail payments due to capacity, speed constraints and transaction fees. In the near term, it is perhaps easier to envisage that cryptocurrencies may be attractive for certain types of transactions, for instance cross-border payments.
Cryptocurrencies should be regulated in order to protect individuals and public policy goals. As a central bank, we are particularly concerned about promoting monetary and ﬁnancial stability and a well-functioning payment system. The case for international cooperation is obvious. The European Commission has taken the initiative to regulate cryptocurrencies in the EU/EEA. The purpose is to foster innovation, safeguard ﬁnancial stability and protect investors. The initiative is primarily aimed at the issuance, custody and exchange of crypto-assets and related services. Regulation in this area is currently lacking, and Norges Bank welcomes the initiative. Use of crypto-assets as a means of payment raises further regulatory issues that should be addressed.
JT: According to the BIS, two-thirds of the world’s central banks are running experiments on whether to launch digital currencies. How would you describe the case for digital ﬁat currencies?
IWB: Most central banks are mandated to promote a secure and efficient payment system in the domestic currency. Typically, this is done through regulation, oversight and operational functions. A central bank digital currency (CBDC) is part of the last category of measures. We have to consider the economic costs and beneﬁts of different measures in order to decide if introducing a CBDC is appropriate.
Furthermore, the case for a CBDC depends on the ﬁnancial structure of the relevant country. For example, ﬁnancial inclusion and payment efficiency can be particularly important purposes for a CBDC in countries with poorly developed banking and payment systems. For a more developed country, other issues might be more important. Norges Bank’s research is motivated by falling cash usage and a need to be precautious: Norges Bank wishes to be prepared if the monetary and payment system evolves in an undesirable direction.
JT: What is Norges Bank’s view on a digital krone? Could you tell us a bit about your testing and ambitions for an e-krone?
IWB: A recent report by a Norges Bank working group discusses the characteristics a CBDC must have, relevant technical solutions and the impact on banks of introducing a CBDC. The research into CBDCs and developments in the monetary and payment system have shown the importance of pursuing this work further. Norges Bank has thus recently decided to continue its research for a new phase of up to two years, comprising experimental testing of technical solutions and further analysis of purposes and consequences of introducing a CBDC. The purpose of technical testing is to shed light on how solutions can deliver the necessary characteristics of a CBDC, and to uncover potential unintended consequences. Testing can also reveal economic and regulatory issues that are not captured by purely analytical work. In the testing phase, Norges Bank will seek to make use of experience from testing by other central banks and collaborate with them wherever appropriate. Norges Bank will draw on external providers in its technical testing work. This project phase is intended to provide a basis for deciding whether Norges Bank will test a preferred technical solution.
JT: An October 2020 ECB consultation showed that people’s greatest concern over a digital euro was that it could erode their privacy. What are your thoughts on this?
IWB: This is an important concern. If physical central bank currency – cash – is replaced by digital central bank currency, then payments would likely leave a larger electronic footprint. There is certainly a trade-off between citizens’ legitimate preferences for privacy and the need to prevent and detect criminal activity. Some central banks, such as the ECB, have experimented with solutions that would be in accordance with regulation, e.g. to combat money laundering, while at the same time limiting the payment information available to the central bank. This would contribute to privacy for users and is an interesting area for further research. In any case, CBDC data gathered by us would not be used for commercial purposes. That might be different for systems based on bank deposits and other privately issued money.
Note also that the level of privacy and relevant trade-offs are not only up to the central bank to decide. We think that a CBDC infrastructure should be sufficiently flexible to cater for different policy choices. Substantial privacy, and perhaps even full anonymity for low value transactions, should not be excluded by design. However, privacy does not need to imply anonymity.
JT: The ECB’s Fabio Panetta recently said a digital euro could be ready for use in about ﬁve years’ time. Do you think this is realistic? What would you expect for Norway and the Nordic countries?
IWB: This is too early to say. This is a new and complex issue, and there is a need for more information to be able to conclude whether introducing a CBDC is an appropriate measure. Note also that any decision to introduce a CBDC would require a political decision and possibly also an amendment to the Central Bank Act.
JT: How do you think an introduction of digital central bank currencies could affect the role and functioning of the banking system? Is there a major risk of disintermediation for areas such as deposits and payments?
IWB: Large and sudden shifts from bank deposits to CBDC could affect the banking system in an undesirable way. A CBDC system should be designed in a way that avoids such effects. If a Norwegian CBDC is introduced, it would be intended as a means of payment, not as a store of value. This would limit the size of the system and thus also the impact on the banking system. “Frictions” such as volume restrictions and a non-competitive rate of interest would support this. Furthermore, the success of a CBDC system would be highly reliant on good cooperation with the private sector. We would depend on banks and other payment market participants to provide payment services to users with CBDC as the money source.