On Monday, Norwegian startup Nahmii announced it was selected by Norway’s central bank Norges Bank to build its central bank digital currency (CBDC) sandbox. The solution will include Layer 2 blockchain protocols which are used to achieve scalability. After initial publication, the central bank responded to our queries confirming the tests will use a private enterprise blockchain, not public.
Nahmii emphasized that the sandbox will explore many different technologies.
Public blockchain for CBDC?
Layer 2 blockchain protocols are reliant on the security of the parent or Layer 1 network. Nahmii specifically mentioned leveraging public blockchain security such as the Ethereum mainnet. The company has been working on this scaling technology for Ethereum for four years and the Nahmii network has a cryptocurrency token.
However, a central bank spokesperson stated that tests would use a private version of the enterprise blockchain Hyperledger Besu.
“At this stage of the experimental testing the consideration of layer 2s are relevant in the sense that they can serve as “bridges” between different registers/ledgers that may have different characteristics in serving the requirements of a CBDC,” said the spokesperson.
Norges Bank has also published a blog post on its approach.
Other CBDC tests, including Thailand’s, have used layer 2 solutions for scaling. In Thailand’s trials, the layer 1 blockchain was also a private permissioned version of Ethereum.
Last year Norges Bank published a CBDC report as part of a consultation process. At the time, it explicitly addressed the topic of a CBDC on a public blockchain. It gave a negative conclusion because of “the lack of control for Norges Bank, risks associated with immature technology and challenges related to scalability and speed.”
However, that was a year ago, and attitudes have evolved towards public blockchain, although to a lesser extent in the central bank community. If CBDCs are to be an alternative option to stablecoins, they may need to exist on public blockchains.
A recent BIS survey found that the growth of cryptocurrency was a key driver behind CBDC initiatives.
Norges Bank has been exploring CBDC for five years and started investigating technical solutions when it published the paper last year.
Nahmii will be responsible for training the central bank’s users and partners, with most of Norway’s major banks expected to participate.
Update: The article has been updated with a response from Norges Bank stating its tests use a permissioned blockchain