The ability to make offline payments with central bank digital currencies (CBDCs) has attracted increased interest among central banks for their potential to support public policy objectives including financial inclusion, universal access, payment system resilience and privacy.

A survey conducted by the Bank for International Settlements (BIS) Innovation Hub Nordic Centre found that central banks view offline payments with retail CBDC as an important feature, with 49% considering it to be vital and 49% considering it to be advantageous.

But despite these perceived potential benefits, monetary authorities considering the implementation of CBDCs with offline functionality must take into account a complex matrix of issues relating to security, privacy, likely risks, the types of solution, their maturity and applicability, a new paper by BIS says.

The paper, titled A handbook for offline payments with CBDC and compiled in partnership with UK consultancy Consult Hyperion, addresses these issues and explores key aspects of how CBDCs could work for offline payments.

Ultimately, there is no “one-size-fits-all” solution, the paper says, and each country has different reasons for providing offline payments with CBDC. This means that the types and forms of offline payments will vary from one country to another depending on their objectives and local requirements.

The paper outlines three different modes of offline payments: the fully offline mode, which allows payments to be completed and settled without the need to connect to a ledger; the intermittently offline mode, which, like the fully offline mode, enables the payee to spend the value received at the end of the transfer, but which imposes transaction limits and requires synchronization with the central system intermittently; and the staged offline mode, where value exchange takes place offline but requires a connection to settle on the payee side and for the value transferred to be spendable.

These modes have different implications for risk management, the level and type of privacy provided, and the resilience conditions that are supported, the paper warns.

Modes of offline payment, Source: A handbook for offline payments with CBDC, Bank for International Settlements/Consult Hyperion, May 2023

The paper also delves into the key components required to support offline payments functionality in CBDC systems, highlighting the need of a user device, a user onboarding process, provisioning and lifecycle management of the wallet, online and offline ledgers, offline risk management, and the software implementing the offline payment functionality which must support value transfer and storage.

It notes that offline payments can be provided through hardware, software or a combination of both, but that this design decision will ultimately impact the solution’s suitability. In some countries, for example, software-based solutions are more appropriate than hardware-based ones, or vice versa, the report notes.

Hardware-based solutions use tamper-resistant chips like those commonly present in popular payment cards. Software-based solutions, meanwhile, are typically smartphone-based and use a range of software techniques to protect cryptographic keys and data both at rest and while they are being processed.

A logical architecture for offline CBDC payment solutions, Source: A handbook for offline payments with CBDC, Bank for International Settlements/Consult Hyperion, May 2023

The paper gives several recommendations, advising central banks to adopt a risk-based approach at the earliest stages of designing the technology and business operations, taking into account specifically security, operational and incident risk management.

Authorities should also clearly define the roles and responsibilities of each of the participants in the ecosystem, and should provide guidance to solution vendors on their expectations for what solutions they should be able to offer.

As part of the report, BIS conducted a survey of central banks to understand their views on offline payments with CBDC. Respondents cited financial inclusion (40%), cash resemblance (40%) and resilience (33%) as their main goals for offline payments with CBDC.

The relevance of offline payments is particularly important in developing countries where individuals use feature phones rather than smartphones, and in areas without Internet access and/or electricity, the research found.

The BIS Innovation Hub Nordic Centre is currently exploring the potential of offline payments using CBDCs through Project Polaris. Over several workstreams, the initiative will see the center provide central banks with essential information on architecture, design, implementation planning and investment considerations to make an informed decision.

Featured image credit: edited from Freepik