Norway's CBDC Raises Privacy Concerns

OSLO, NO – After launching its CBDC (central bank digital currency) Norway is facing headwinds from a skeptical public about the currency’s confidentiality. Norwegians have become concerned that Norway’s CBDC lacks privacy because the digital currency is being transacted on a private blockchain.

Norway’s path to a CBDC

In 2016 Norway began designing its central bank digital currency (CBDC) as a cashless payment system that would also protect against illegal money transfers. At the time, bank executives argued that the need for a digital currency came from the national bank’s inability to track the nation’s currency, the kroner. 

In an interview with VG.no in January 2016, Trond Bentestuen, the bank executive of DNB, explained, “Today, there is approximately 50 billion kroner in circulation and [Norway’s central bank] cannot account for 40 percent of its use. That means 60 percent of money usage is outside of any control. We believe that is due to under-the-table money and laundering.”

Phasing out cash

In September 2022, Norway’s central bank, Norges Bank, launched the CBDC as a layer 2 on the Ethereum network in partnership with Norwegian blockchain developer Nahmii. The testing phase of the digital currency was planned to last through June 2023. 

While an Ethereum layer 2 blockchain was used to build Norway’s CBDC, the currency is transacted on a private version of that blockchain known as Hyperledger Besu. Whereas Norwegian citizens would have the same level of transparency into their own transactions as government officials and bankers on the Ethereum mainchain, citizens do not have the same level of visibility on the private version. 

Public concern grows

Furthermore, privacy concerns are aggravated more by the national banks’ and the government’s abilities to enforce KYC standards and monetary gatekeeping. The CBDC was built on the Ethereum ERC-20 token standard, yet transacting the currency takes place on a private sidechain out of the public eye. 

In a blog post explaining the design, Norges Bank states that the private Hyperledger Besu software “is a private network, unlike the network of the Ethereum cryptocurrency system. This also facilitates the programming functionality offered on Ethereum.” The post goes on saying, “many so-called ‘stablecoins’...have chosen to base themselves on…ERC-20 and Ethereum’s programming language, so the technology is well-tested.”

The concern over CBDCs and public safety were outlined in a report published by the International Monetary Fund (IMF) in September 2022, “In the wrong hands, this data could be used to spy on citizens’ private transactions, obtain security-sensitive details about individuals and organizations, and even steal money.”

CBDCs solving the problem?

Norwegians will have to weigh the convenience and security risks against the privacy concerns and lack of transparency. The original concern brought up by Trond Bentestuen may or may not be a good enough reason to continue with the CBDC. Nonetheless, Norway and several other countries continue to pursue nationalized digital currency adoption.

In the fall of 2022, a consortium of central banks from Norway, Sweden, and Israel started Project Icebreaker to test the proof-of-concept of CBDC’s ability to facilitate cross-border payments. The results are slated to be disclosed at the end of the first quarter of 2023.