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The Bank for International Settlements (BIS) is actively exploring offline payments using central bank digital currency, or CBDC.
On May 11, the BIS Innovation Hub Nordic Center published a detailed guide outlining how CBDCs can work for offline payments.
The guide is written in collaboration with a technical consultant, Consult Hyperion, and aims to address sustainability, cash similarity, accessibility, and other features of a CBDC offline.
Titled “The Polaris Project,” the paper highlights new potential risks associated with offline payments using CBDCs, including counterfeiting or privacy concerns.
According to BIS and Hyperion, offline CBDC payments pose a privacy risk because they can “both support anonymous transactions and expose privacy depending on the design.”
Some of the privacy concerns listed include the level of privacy protection offered by the value transfer protocol. “If the offline value transfer protocol does not support privacy, then offline payments can never be anonymous,” the guide says.
Offline CBDC payment transactions also raise privacy or even fraud issues when it comes to identifying and verifying counterparty users.
In some cases, it may be important for offline payees or CBDC payers to identify the counterparty, and such transactions may not always involve face-to-face contact. Central banks will have to take such situations into account when designing stand-alone CBDCs, BIS writes, adding:
“A payer may want to be sure of the identity of the payee, the accuracy of the data they provide, and that their payment is going to the right place.[…] Impersonation fraud is a potential area of risk that central banks should consider in relation to privacy.”
The paper also mentions the importance of interoperability and risk management systems for offline payments, emphasizing the need to be able to detect potential hacks of offline wallets.
“The roles and responsibilities of the ecosystem in supporting offline payments need to be more clearly defined, and collaboration between the public and private sectors will be required,” the guide notes.
Related: BIS and Bank of England Complete DLT Settlement Pilot Project
Offline functionality is a core feature of several CBDC projects currently being developed by global central banks. As previously reported, countries such as Australia, India and Russia are working on CBDC offline payment technology.
The Central Bank of Australia plans to launch a “live pilot” CBDC with offline payments “in the coming months”. The Reserve Bank of India has been testing standalone CBDC functionality since March 2023. The Central Bank of Russia expects to introduce an offline mode for the digital ruble by 2025.
