The Bank for International Settlements (BIS) has recently expressed interest in exploring offline payments involving a central bank digital currency (CBDC). In a collaborative effort with technical consultancy Consult Hyperion, the BIS Innovation Hub Nordic Centre released a detailed handbook that examines how CBDCs could be employed for offline transactions, taking into consideration objectives such as resilience, cash resemblance and accessibility.
Dubbed “Project Polaris,” the paper raises concerns over new potential risks associated with offline CBDC payments, including counterfeit threats and privacy issues. As per the BIS and Hyperion, the design of offline CBDC payments plays a significant role in the level of privacy they offer. The paper states, “If the offline value transfer protocol does not support privacy by design, then offline payments can never be anonymous.”
Moreover, verifying the identity of counterparty users in the case of offline CBDC transactions can introduce challenges on both privacy and fraud fronts. There are instances when it is crucial for offline CBDC payees or payers to confirm the counterparty’s identity without face-to-face contact. The BIS suggests that central banks should consider such scenarios when designing offline CBDCs, keeping in mind that impersonation fraud poses a significant risk in terms of privacy.
The handbook also discusses the importance of interoperability and risk management systems for offline payments, emphasizing the necessity to detect potential breaches of offline purses. It adds that defining the roles and responsibilities within the ecosystem supporting offline payments is crucial, and fostering collaboration between public and private sectors is essential to achieve it.
Currently, several CBDC projects led by global central banks prioritize offline functionality. For example, prominent nations like Australia, India, and Russia have been working on offline CBDC payment technology. The Reserve Bank of Australia plans to launch a live pilot of a CBDC that includes offline payments in the coming months. Meanwhile, the Reserve Bank of India has been testing CBDC offline functionality since March 2023, and the Central Bank of Russia expects to introduce the offline mode for the digital ruble by 2025.
Although implementing offline CBDCs can pave the way for faster, safer, and more efficient financial transactions, potential risks like privacy threats and fraud must also be considered. By addressing these concerns and exploring the interoperability and risk management systems, both the public and private sectors can work together to create a secure and reliable digital currency environment.
Source: Cointelegraph
