The Bank for International Settlements (BIS) is actively exploring the possibilities of offline payments with a central bank digital currency, or CBDC.
On May 11, the BIS Nordic Center for Innovation published a comprehensive manual exploring how CBDCs could work for offline payments.
The guide, written in collaboration with technical consultancy Consult Hyperion, addresses the objectives of resistance, similarity to cash, accessibility and other characteristics of offline CBDCs.
titled “Polaris Project”, the document highlights potential new risks from offline payments with CBDCs, including counterfeiting or privacy issues.
According to the BIS and Hyperion, Offline payments with CBDCs pose privacy threats, because they can “both support anonymous transactions and reveal privacy, depending on 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 by design, offline payments can never be anonymous,” says the manual.
Offline CBDC payment operations also raise privacy or even fraud issues when it comes to the identification and verification of counterparty users.
In some cases, it can be crucial for offline CBDC payees or payers to identify the counterparty, and these transactions do not always involve an in-person deal. Central banks would need to take these situations into account when designing an offline CBDC, the BIS wrote, adding:
“The payer may want to be sure of the identity of the payee, that the data provided is valid, and that their payment is going to the right place. […] Phishing fraud is a potential area of risk for central banks to consider in relation to privacy.”
The document also mentions the importance of interoperability and risk management systems for offline payments, underlining the need to be able to detect potential breaches by offline wallets.
“The roles and responsibilities of the ecosystem in supporting offline payments need to be better defined, and collaboration between the public and private sectors will be necessary,” points to the manual.
Offline functionality is one of the main features of various CBDC projects currently being developed by central banks around the world. As previously reported, countries like Australia, India, and Russia have been working on offline CBDC payment technology.
Australia’s central bank plans to launch a “live pilot” of a CBDC that includes offline payments “in the coming months.” The Reserve Bank of India has been testing the offline functionality of CBDCs since March 2023. The Russian central bank hopes to introduce offline mode for the digital ruble in 2025.
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