The Bank for International Settlements (BIS) examined the use of central bank digital currencies (CBDC) for offline payments. The study found that offline CBDC payments pose a serious threat to user privacy, as well as fraud risks.
The BIS Innovation Hub Nordic Center, in cooperation with Consult Hyperion, published a detailed handbook for central banks called Project Polaris. The project explored various options for using CBDCs for offline payments and the risks associated with offline transaction mechanisms of public digital currencies.
Thus, the handbook’s main conclusion is that offline CBDC payments involve privacy risks, as they can be anonymous or implicitly reveal the user’s identity, depending on the specific implementation. Problems can arise due to the level of privacy protection provided in the value transfer protocol.
The handbook also states that conducting CBDC payment transactions offline can carry the risk of fraud. Some interactions require identification of counterparties, but reliable confirmation of identity isn’t always feasible, potentially leading to the falsification of personal information and facilitating fraud.
BIS analysts emphasize the importance of interoperability and risk management systems for offline payments with CBDCs and the need to clearly define the roles and responsibilities of ecosystem participants in supporting offline payments and public-private collaboration.
Project Polaris aims to help central banks design and implement offline CBDC payments, taking into account all intended use cases. However, analysts stress that the privacy, sustainability, and risk management of using CBDCs for offline payments will depend on each individual country, as there’s no “one-size-fits-all solution.”
According to Beju Shah, Head of the BIS Innovation Hub Nordic Centre, implementing offline payments with CBDCs will require a deep understanding of the technology, consideration of security threats and risks, and the need to develop privacy, inclusivity, and sustainability protocols.
Project Polaris recommends that central banks assess risks early, use secure software, infrastructure, and technology, and ensure that the technology is user-friendly and simple.
The BIS is actively experimenting with CBDCs, considering various options for using the central bank digital currencies. For example, Project Icebreaker, which tested the use of CBDCs for cross-border payments between Israel, Norway, and Sweden, was recently completed successfully. The BIS also launched Project Mariana, aimed at exploring the possibility of using DeFi protocols for cross-border payments with CBDCs.
