Norway’s Norges Bank Backs EU’s MiCA as It Explores CBDC Development

Norway’s central bank, Norges Bank, has thrown its weight behind the European Union’s Markets in Crypto-Assets (MiCA) regulation as it evaluates the potential launch of a central bank digital currency (CBDC).

The move aims to bolster financial stability and facilitate smoother cross-border transactions, aligning Norway’s digital finance initiatives with EU standards.

In remarks reported by Cointelegraph, Kjetil Watne, who leads Norges Bank’s CBDC project, highlighted Norway’s proactive stance on digital finance regulation. Although the nation continues to assess whether additional safeguards are necessary to address financial risks, Watne confirmed that aligning with MiCA is a key step in Norway’s regulatory roadmap.

Norges Bank, Source: Wiki Commons

As a member of the European Economic Area (EEA), Norges Bank is particularly interested in how MiCA’s regulatory framework could integrate with a future CBDC. While no decision on launching a CBDC has been made, Watne underscored that the bank is studying how such a currency could enhance the country’s financial resilience and close regulatory gaps in decentralized finance (DeFi). The Ministry of Finance is also reviewing MiCA, further signaling Norway’s intention to harmonize its financial regulations with EU standards.

CBDCs for Cross-Border Payments: Project Icebreaker 

Norges Bank’s interest in CBDCs extends beyond national borders. The bank recently participated in “Project Icebreaker,” an experimental initiative exploring cross-border CBDC applications. Watne views CBDCs as a game-changer for international payments, though he noted that the concept remains in the research phase. If implemented, a Norwegian CBDC would complement, not replace, physical cash, giving citizens more payment options.

Addressing privacy concerns, Watne stressed that Norges Bank would not track individual CBDC transactions, ensuring user privacy while adhering to anti-money laundering (AML) protocols. This approach mirrors the privacy safeguards adopted by most central banks globally.

The project’s final report, Project Icebreaker: Breaking New Paths in Cross-Border Retail CBDC Payments, introduces a hub-and-spoke model designed to interlink domestic CBDC systems. In this setup, cross-border transactions are divided into two domestic payments, coordinated through a central hub. Importantly, the retail CBDCs remain within their respective systems, minimizing complexity and risk.

Traditionally, cross-border payment systems offer little choice in foreign exchange (FX) rates, as payers are dependent on a single FX provider. In contrast, the Icebreaker model invites multiple FX providers to submit competitive quotes to the hub, which then selects the best rate for the user. This mechanism not only lowers costs but also mitigates liquidity risk, ensuring that users can access favorable exchange rates even during periods of high demand.

The system also supports the use of bridge currencies when direct currency pair conversions are unavailable or unfavorable, further enhancing competition and efficiency among FX providers.

The hub-and-spoke model demonstrated several advantages:

• Reduced Settlement and Counterparty Risk: By facilitating transactions in central bank money, the model minimizes the risks typically associated with cross-border payments.
• Near-Instant Settlement: Cross-border transactions can be completed within seconds, a significant improvement over traditional payment systems, which often take days.

For countries developing domestic CBDCs, this model offers a scalable solution to extend their functionality to international payments.

Implications for Central Banks and Future CBDC Development

Project Icebreaker provides valuable insights for central banks evaluating retail CBDC implementation. It highlights the technical and policy options available, emphasizing scalability and interoperability. The project’s proofs-of-concept demonstrated that even systems running on different technologies can be interconnected with minimal technical requirements, underscoring the simplicity and flexibility of the hub-and-spoke approach.

By addressing key challenges in cross-border payments—high costs, slow processing times, and liquidity risks—Project Icebreaker sets a new benchmark for international retail CBDC systems. It offers a practical framework for central banks seeking to enhance their domestic CBDC systems with seamless cross-border capabilities, paving the way for more efficient and inclusive global financial networks.

Source: Project Icebreaker

Broader Regulatory Implications and Industry Reactions

MiCA, set to take effect in December, has sparked debate over its potential impact on the financial system, particularly regarding stablecoin reserves. Tether CEO Paolo Ardoino recently raised concerns about systemic risks if a European bank holding stablecoin assets were to fail, highlighting the delicate balance regulators must strike.

Meanwhile, in a separate development that underscores the growing mainstream acceptance of digital assets, a UK pension fund made headlines by allocating 3% of its portfolio to Bitcoin—an unprecedented move in the British pension sector. Guided by consultancy Cartwright, the fund aims to diversify its holdings and enhance long-term resilience.

As Norway advances its exploration of a CBDC and aligns with MiCA, the country positions itself at the forefront of regulated digital finance in Europe, setting the stage for a more interconnected and secure financial future.