In this article, we explore some of the key challenges associated with offline payments, why they must be an integral part of any central bank digital currency project and how to ensure that – while offline – they are secure and resilient enough to protect against cyberthreats and other financial crime.
What are offline payments?
Online payments are reliant upon an internet connection and integrations with several intermediaries including banks, payment providers and payment networks who can authorise and process transactions. Although these networks have been configured in a way that ensures they are almost always accessible, there is still the possibility that users may experience little or no access to network connectivity.
This is where offline CBDCs come in. As CBDCs are built on electronic systems, which comes with its own challenges, offline CBDCs enable users to make transactions without access to the internet, no matter the location.
Stored via an app or smartcard, users could add money to the offline CBDC wallet via their online CBDC account, in the same way you would withdraw cash from an ATM. It’s important to note that because of this, they share the qualities of anonymity associated with cash. This means that once money has been withdrawn, any further transactions would usually remain anonymous.
However, difficulties arise when it comes to the implementation of such systems – ensuring the card knows how much smart cash is stored on it or when it’s allowed to add to the balance. To protect offline CBDC transactions from attackers and counterfeiting, banks should look at deploying strong cryptography and robust key management to protect the sensitive data being processed. These measures will help to ensure that users can continue making offline payments but prevent them from spending the same money twice.
Why offline payments are integral to CBDCs
We know that many central banks are exploring the creation of CBDC. However, one of the key design features is the ability to conduct secure point-to-point offline transactions. An offline capability for CBDCs as digital cash can create a resilient payment system for consumers and businesses to transact in any situation.
However, without the correct technology in place, banks risk putting themselves at risk of digital counterfeiting. By implementing an offline solution for CBDCs, banks can work towards building a safe, trusted payment system for both businesses and users alike.
Quant has experience trialling this. During our work on Project Rosalind, the Bank of England’s experiment into a retail CBDC, one of the project requirements was to test how a CBDC could work offline. We worked with a third-party provider that allowed us to test their card for offline payments to prove that offline payments would be possible.
Enabling broader financial inclusion
As financial services continue to strive for financial inclusion, offline payments will play a pivotal role. This is even more important for people living in areas that lack the technical infrastructure needed to remain connected, or for the percentage of the population who are unbanked. With the Bank for International Settlements citing offline use as the most crucial element to promoting financial access, it is paramount that central banks looking to implement CBDCs continue their research into how they can conduct secure offline transactions.
While 90% of individuals in high-income countries have easy internet access, this figure drops to just 58% for those in low and middle-income countries – exemplifying the clear correlation between offline payments and financial inclusivity. But it is not just technology that plays a key role here. Central banks must work towards developing a solution that considers how the technology, processes and regulation will work together to support a secure and functional offline solution.
The rise of global adoption
We’re now starting to see countries across the globe working on the issuance of digital money. Sweden’s e-krona aims to offer the public continued access to state money, even if cash is not widely used, strengthen the resilience of the payment system by combining its own infrastructure with offline features, improve inclusion and enabling the connection of different national central bank digital money systems to facilitate cross-border payments. In Riksbank’s latest report, they announced that they are now progressing their work into how an e-krona can be used for offline payments if electricity and telecommunications are limited or broken.
And there are other examples of countries trialling offline payment solutions as part of their CBDC projects. In March 2024, Brazil’s central bank announced that they are partnering with technology firm, Giesecke+Devrient, to build an offline payment solution that will enable them to support users in remote areas without internet access or electricity, or after outages or disasters.
What will the future of this landscape look like?
For central banks across the world who are exploring CBDCs, developing a secure and reliable digital version of cash for users, regardless of whether that person is connected to the internet, is imperative. As central banks continue the development of CBDCs, they must ensure it is accessible to all, in a way that allows all users to benefit from the growing innovations within financial services.
The potential of CBDCs holds huge opportunity for both societies and their economies. However, for this to become reality, they must be available to everyone, everywhere and all the time.
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