There is no ‘one-size-fits-all’ solution to enabling central bank digital currencies (CBDCs) to work in an offline environment, according to a 119-page handbook published by the Bank for International Settlements (BIS) Innovation Hub.
The ability to make CBDC payments offline – one of the highest-profile challenges facing CBDC designers worldwide – means being able to use a CBDC without being connected to the internet, either temporarily or because of coverage limitations.
Central banks considering the potential implementation of CBDCs with offline functionality must take into account what BIS describes as ‘a complex matrix of issues including security, privacy, likely risks, the types of solution, their maturity and applicability, and operational factors.’
The handbook, released today (11 May), addresses these issues as well as objectives for resilience, inclusion, accessibility and other desired attributes.
The degree to which CBDCs will be provided or used offline will vary significantly by country, region, demographics and specific contexts, which will also influence the solutions chosen, the handbook states. In some countries, software-based solutions will be more appropriate than hardware-based ones and vice versa.
A survey of 55 central banks undertaken as part of the handbook’s development showed that 49 per cent of central banks surveyed consider offline payments with retail CBDC to be ‘vital’ while another 49 per cent deemed it to be ‘advantageous’ (two per cent said ‘not needed’).
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CBDCs ‘must work for everyone’
Production of the handbook has been overseen by the BIS Innovation Hub’s Nordic centre, which opened in 2021 in Stockholm, as part of its ‘Project Polaris’ initiative.
This initiative has several workstreams and the overall aim of providing central banks with the ‘essential information needed to inform decision-making, architecture, design, implementation planning and investments’. The project will also address ‘long-term change and operational considerations’.
The BIS Innovation Hub’s Nordic centre is hosted by the Riksbank, working in partnership with Norges Bank, Danmarks Nationalbank and Central Bank of Iceland. It is headed by Beju Shah, who was formerly special adviser for digital innovation at the Bank of England (BoE).
“CBDC systems, like all digital payment systems, must work for everyone in society, whenever and wherever individuals and businesses need them,” Shah said in a press release on ‘Project Polaris: A handbook for offline payments with CBDC’. “The ability to pay when offline could ensure this is achieved by providing a layer of resilience, as well as supporting inclusion, accessibility and privacy objectives.”
“Implementing offline payment capabilities will require a deeper understanding of the technologies, security threats, risks and mitigating measures, as well as design criteria for privacy, inclusion and resilience. This handbook is intended as a guide to central banks starting this work,” Shah explained.
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BIS and BoE’s private-sector support
The handbook was compiled by Shah and colleagues in partnership with a UK-headquartered company that has been working for the BoE in advancing its research into the technical possibilities of a potential UK CBDC.
Global Government Fintech revealed four months ago that the BoE had engaged Consult Hyperion – whose head office is in the UK town of Guildford but which also has a presence in New York City – on a pair of CBDC assignments each carrying a value of more than £100,000 (about $126,000). The company was also used by the BoE on a small CBDC project in 2022.
The BoE decided last October to bring in external expertise for its own project focused on offline CBDC payments. The UK central bank published a supplier opportunity on the government’s ‘Digital Marketplace’ for the development of at least one proof-of-concept for offline payments in a CBDC.
A contract valued at £100,620 was awarded to Thales UK on 16 December and ran from 9 January 2023 to 8 May 2023 (according to a ‘CBDC Proof of Concept and Research of Offline Payments’ contract award notice published on 26 April 2023). The opportunity notice, which specified a budget of £200,000-£250,000, described offline payments as ‘one of the most complicated elements of a potential UK CBDC’ that ‘require thoughtful consideration and design’.
UK authorities are currently running a consultation ahead of the potential decision to issue a digital pound. The BoE and HM Treasury issued a long-awaited ‘Digital pound: a new form of money for households and businesses?’ paper in February, with its overarching message being that a British CBDC is ‘likely to be needed in the future’. The BoE also simultaneously issued a ‘Digital pound: technology working paper’ (which includes three pages on offline payments). The consultation’s deadline for responses is 7 June.
FURTHER READING
Global Government Fintech’s ‘Digital Currencies’ section
GLOBAL GOVERNMENT FINTECH LAB 2023: REGISTER NOW
The Global Government Fintech Lab 2023, taking place in Dublin on Thursday 18 May, features a panel session on CBDC. The Lab, our one-day event for senior public servants interested in exploring and implementing fintech solutions, is being organised in partnership with Ireland’s Department of Finance. The event is free to attend for all public servants
