Offline Central Bank Digital Currencies: Bank of England Discovers the Hurdles
News Article: Exploring the Challenges and Solutions in the Bank of England's Digital Pound
The Bank of England is delving into the complexities of an offline central bank digital currency (CBDC) for a potential digital pound. This exploration, part of the CBDC design phase, involves testing solutions from various providers such as Thales, Secretarium, IDEMIA Secure Transactions, Quali-Sign, and Consult Hyperion.
The primary line of defense against counterfeiting and double spending in the offline CBDC is the cryptographic keys used within the secure element of the device. However, the limited storage capacity of these secure elements caps the number of transactions possible before reconnecting to the network.
A challenge with the offline CBDC is that it keeps online and offline balances separate in the wallet. Without transaction records to reconcile with the online ledger, it's not possible to detect counterfeits and double spending. To address this, a centralized system for uploading offline transaction data was tested, using confidential computing to protect personal data.
Secure elements, while widely used for payments, are usually combined with simultaneous online checks. But this is not the case with an offline CBDC. Without these online checks, it's crucial to ensure that the secure elements are tamper-resistant and transaction counters are in place to prevent fraud.
Another area of concern is what happens if the secure element is compromised. When records are kept, intermediaries need to share these records for detection purposes. Imposing transaction limits to address potential risks impacts usability. Any kind of time limits for transactions are challenging because smart cards don't have clocks, and the time on smartphones might be changed.
Various privacy-preserving technologies were tested to safeguard personal information. The Bank of England's digital pound is being designed as a retail CBDC with a platform model. The central bank issues digital pounds via a central ledger, while private-sector firms provide wallets and payment services. This separation aims to preserve privacy by allowing users to interact with intermediaries rather than the central bank directly.
The Bank plans a gradual rollout with nationwide acceptance of Near Field Communication (NFC) point-of-sale (PoS) terminals supporting offline transactions. NFC support is crucial for offline usability, enabling transactions without an active internet connection.
Despite these advancements, the momentum on the digital pound has stalled. Existing payment systems and private sector innovations, such as tokenized deposits and faster electronic payments, are meeting consumer needs well, reducing the perceived advantages of a government-backed digital currency. Governor Andrew Bailey and BoE officials express skepticism about the need for a new form of money like a CBDC, preferring to encourage private-sector payment innovations instead.
The challenges of ensuring privacy in offline transactions while still preventing illegal activities and ensuring regulatory compliance remain complex. Security concerns about offline usage include the risk of double spending because without online validation, the system must rely on local device security and cryptographic guarantees to prevent multiple spending attempts of the same digital token.
In conclusion, the Bank of England's current stance highlights that while technical solutions like NFC-enabled wallets with cryptographic protections for offline use exist in the design stage, the primary challenges lie in ensuring robust privacy and security offline without undermining consumer usability—and the broader strategic question of whether a retail CBDC is needed at all given evolving private payment innovations. This tension currently shapes the future prospects of the digital pound.
- The Bank of England's digital pound is being designed as a retail CBDC with a platform model, where the central bank issues digital pounds via a central ledger, while private-sector firms provide wallets and payment services, aiming to preserve privacy by allowing users to interact with intermediaries rather than the central bank directly.
- The challenges of ensuring privacy in offline transactions while still preventing illegal activities and ensuring regulatory compliance remain complex for the Bank of England's offline CBDC, as without online validation, the system must rely on local device security and cryptographic guarantees to prevent double spending.
- To address the issue of separate online and offline balances in the offline CBDC, a centralized system for uploading offline transaction data was tested, using confidential computing to protect personal data.
- The need for a new form of money like a CBDC is being questioned by Governor Andrew Bailey and BoE officials, as existing payment systems and private sector innovations, such as tokenized deposits and faster electronic payments, are meeting consumer needs well, reducing the perceived advantages of a government-backed digital currency.
