The BIS Innovation Hub has published a handbook on offline central bank digital currency (CBDC) payments which explores the motivations, risks and potential solutions as part of Project Polaris. It’s generally accepted that offline CBDC presents higher risks than an online version because double spending and counterfeiting are easier in the absence of online checks. However, these are not the only risks.
The paper also highlights the challenge for business models that make an offline CBDC attractive to both merchants and consumers.
There are some interesting central bank survey statistics. Forty-nine percent of central banks believe offline functionality is essential for a CBDC and another 49% see it as advantageous.
When it comes to privacy, all central bankers see an offline version of a CBDC having at least as much privacy as an online one, with 44% expecting it to have heightened privacy levels, closer to cash. However, they are concerned about the risks of money laundering.
Privacy came in as point five in a list of 11 motivations which we suspect was in order. Top of the list is ensuring payment resilience as the dependence on digital payment systems increases. However, the duration of an outage is a major factor to consider in design. For example, some solutions might only allow cash to go through two or three hops before verification is required. That might not work for a days-long outage.
The second driver is the resemblance to cash, such as the ability to load offline cash from an ATM. However, anonymity is unlikely to be fully achieved. Rounding out the top five offline CBDC motivations are the ability to enable financial inclusion and digital inclusion without the need for smartphones and addressing a lack of reliable internet connection in some regions.
While this handbook is comprehensive, reaching almost 120 pages, the Bank of Canada published a paper in February regarding different types of offline CBDC. Unsurprisingly given the tsunami, Japan was one of the first to explore the topics and Visa has also published a paper.