The Bank of Canada published a research note on using central bank digital currency (CBDC) for offline payments. These sorts of payments resemble physical notes and coins more closely than digital currency.
Various scenarios lead to the need for an offline CBDC. For example, it could be a temporary lack of internet access, such as during a flight or because of a telecoms outage. This use case is referred to as intermittent offline CBDC.
Alternatively, there could be a longer term need to make payments without the internet, which needs an extended offline CBDC. That might apply in a remote area, a weather event or a natural disaster.
A user that is intermittently offline might make a payment while they temporarily have no internet connection, but the recipient can only spend the funds once internet access confirms it is a legitimate transaction.
In contrast, an extended offline CBDC relies on hardware devices for the security of payments rather than the internet. That means that even if the currency is received offline, it can be re-spent. This sort of CBDC might use hardware security in smartphones or special purpose devices.
Both avenues create additional risks, especially the extended offline CBDC. If one type of hardware device is compromised, then that could result in a loss of currency for many people. As a result, users are likely to be warned of the risks and there will be restrictions on the amount of CBDC held and transaction values.
One topic we’ve haven’t seen fully covered is how one prepares for an unpredictable but extended offline event such as a natural disaster. It’s conceivable to prepare merchants to distribute an offline CBDC, but most people won’t be able to digitally access their money to exchange it for the offline one. For now it’s probably less urgent because there is still considerable amounts of cash in circulation. Nonetheless it will become urgent in the near future.
It’s also conceivable that offline CBDC might provide a privacy level more similar to cash.
Interest in offline CBDC appears to be accelerating. The Nordic branch of the BIS Innovation Hub recently launched Project Polaris, which is looking for offline CBDC solution providers. IDEMIA recently won an award for its offline solution at the G20 CBDC Techsprint. Visa and the Bank of Japan have previously published papers on the topic.
