Norges Bank is in the early stages of looking at how an anonymous digital currency might work in Norway’s financial system.
According to a recent article on CoinBase, Norges Bank’s deputy governor spoke at an event at the Norwegian Academy of Science about the differences between money held in banks today and the proliferation of digital currencies. He set the research against the backdrop of a world in which Bitcoin and other digital currencies are starting to be adopted beyond speculative investment.
Up until now, BitCoin has hit the headlines in Norway twice: Firstly when a young Oslo man was able to buy an apartment with an original $27 investment in Bitcoins, and secondly when the Government did a U-turn and declared BitCoin VAT-free, which essentially legitimatised it as a currency.
First up, some background. The sum total of banknotes and coins and bank reserves at Norges Bank is about NOK 85 billion, but the total money supply is much larger than this. The total of deposit money, including customer deposits in banks, total more than NOK 2 trillion in Norway. 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.
Digital currency better mirrors cash
Nicolaisen said that the peer-to-peer and identity-obscuring aspects that mirror cash, something that “new payment solutions may be able to offer” in the future, will be particularly attractive to users. But he also cautioned that a central bank launch of a digital currency could have significant implications for today’s financial system.
Here is an excerpt from his speech:
“For many consumers, electronic central bank money could provide an alternative to deposit money in a bank, as cash does today. Banks can attract deposits through the interest rates they offer. But their ability to create money and extend credit could nonetheless be affected, especially if this new form of electronic money enters into widespread use.”
“Private digital currencies providing anonymity are already on the market. These currencies can also be used even if banks’ systems fail – as long as the Internet is still functioning. The same applies to platform currencies and e-money. However, there are other crucial characteristics missing from these solutions – they are not backed by any authority and the level of foreign exchange and credit risk can be high.”
“One alternative currently being discussed is the introduction of electronic central bank money. There are several ways of achieving this: consumers can have an account either at the central bank itself or in a system controlled by the central bank. Another possible solution is for Norges Bank to issue a payment card or develop an app for consumers to use for anonymous payments.”
Banknotes, electronic money, or both?
“Which brings us to another question: which means of payment should be the statutory form of legal tender in Norway if we introduce electronic central bank money? Should it be banknotes and coins, or Norges Bank’s electronic money, or both?”
“We must also ask ourselves what the consequences will be for the banking system. For many consumers, electronic central bank money could provide an alternative to deposit money in a bank, as cash does today. Banks can attract deposits through the interest rates they offer. But their ability to create money and extend credit could nonetheless be affected, especially if this new form of electronic money enters into widespread use.”
“Norges Bank has begun the work of assessing what the future form of money should be. This is a long-term process. Whatever the conclusion, we can be fairly certain that banknotes and coins will be with us for many years yet. Deposit money in banks will most likely continue to be the dominant means of payment, even if electronic central bank money is introduced. Nevertheless, the very fact that these questions are being raised heralds a new era for our monetary system.”
“Choosing the direction our future monetary system and payment system will take requires not only economists, but also technologists, lawyers and other social scientists. And political decisions will ultimately need to be made by our elected representatives. It devolves upon the Storting (the Norwegian Parliament) to supervise the monetary system of the realm.”
“The questions are numerous, but we already have one of the answers. Central banks were established to build confidence in the monetary system. That is still our primary task. We cannot leave the monetary system entirely in the hands of private entities. There will be a role for central bank money. We must have a legislative framework and a means of payment backed by the authorities to ensure trust in our money – as history has shown.”
You can read the full text here: PDF download