Exploring the hurdles in offline central bank digital currencies, as discussed by the Bank of England.
The Bank of England is delving into the realm of offline central bank digital currency (CBDC) for a potential digital pound, as part of its central bank digital currency (CBDC) design phase [3]. In this endeavour, the Bank has been evaluating various solutions to address the unique challenges posed by offline transactions.
One of the key areas of focus is ensuring usability in limited or no connectivity environments. The Bank is exploring a range of technologies, from fully offline wallet-to-wallet transfers to SMS/USSD-based methods that operate on basic cellular networks [1][2].
Another crucial aspect is fraud prevention and security. Secure elements, such as smartcards or secure hardware on phones, are embedded in devices to safeguard transactions. Transaction limits are also imposed to reduce exposure to fraud during offline use. Staged reconciliation, where offline transactions are subsequently synchronized with the online core ledger, helps maintain overall ledger integrity and prevent double spending or counterfeit risks [1][2][4].
However, the Bank acknowledges that a perfect solution does not exist; instead, a tailored mix of technologies must be deployed according to local infrastructure, user needs, and risk tolerance [1][2][4]. This approach necessitates ongoing technological agility and proactive risk management strategies rather than relying solely on device security assumptions.
In terms of privacy, various privacy-preserving technologies have been tested to safeguard personal information during offline transactions and data upload [2]. A centralized system for uploading offline transaction data was also tested, using confidential computing to protect personal data [2].
The trials have demonstrated that it might be technically feasible to implement an offline payment functionality for a digital pound [4]. However, several challenges remain, such as security, performance, and user experience issues that need to be addressed further [1][2].
For instance, smart cards do not have clocks, and the time on smartphones might be changed, making any kind of time limits challenging [1]. The limited storage capacity of secure elements caps the number of transactions possible before reconnecting to the network [2]. Offline transactions, even with records, require intermediaries to share records with each other for detection purposes [2].
Another challenge is that offline and online CBDC balances are kept separate in the wallet [2]. This means that offline transactions do not affect the online balance immediately, which can lead to discrepancies if not properly managed.
In conclusion, the Bank of England's plan involves piloting and researching various offline payment technologies combined with risk controls and operational safeguards to ensure usability and fraud resistance for an offline-capable digital pound [1][2][4]. The Bank will continue to address these challenges to pave the way for a secure and accessible digital pound.
References: [1] Bank of England (2021). Offline CBDC: Exploring the potential for a digital pound. Retrieved from https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2021/march-2021/offline-cbdc-exploring-the-potential-for-a-digital-pound.pdf [2] Bank of England (2021). CBDC Design Phase: Offline CBDC and the digital pound. Retrieved from https://www.bankofengland.co.uk/research/digital-currencies/cbdc/cbdc-design-phase-offline-cbdc-and-the-digital-pound [3] Bank of England (2021). CBDC: The future of money? Retrieved from https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2021/june-2021/cbdc-the-future-of-money.pdf [4] Bank of England (2022). CBDC: Offline CBDC trials. Retrieved from https://www.bankofengland.co.uk/research/digital-currencies/cbdc/cbdc-offline-trials [5] The Guardian (2022). Bank of England rethinks digital pound as private sector innovates. Retrieved from https://www.theguardian.com/business/2022/jul/14/bank-of-england-rethinks-digital-pound-as-private-sector-innovates
- The Bank of England is considering a blend of technologies for an offline digital pound, including secure wallet-to-wallet transfers and SMS-based methods that function within limited network connectivity, with the aim of ensuring usability in such environments.
- To prevent fraud and ensure security, technologies such as smartcards, secure hardware on phones, transaction limits, and staged reconciliation have been evaluated, working towards safeguarding transactions and the overall ledger integrity.
- In terms of privacy, the Bank has tested various privacy-preserving technologies ands a centralized system for data protection during offline transactions.
- The Bank's offline payments study involves researching and testing different technologies while implementing risk controls and operational safeguards to create an accessible and secure digital pound, with an ongoing focus on addressing challenges like security, performance, and user experience.
