How to manage offline CBDC payments

Today we talk to Dr. Raoul-Thomas Herborg, Managing Director CBDC at G+D, about the importance and some of the challenges of introducing offline CBDC payments.

Dr. Herborg, why are we even talking about offline payments when we live in an always online digital age?

I think there are three very good reasons why we have to consider offline payments as part of any CBDC ecosystem:

1. Legal tender
   If a central bank makes merchants accept CBDC as legal tender it has to be as easy as possible for merchants to utilize. It must be universal, accessible, easy to use, regardless of time and place – also in areas without a network connection.
2. Financial inclusion
   Almost half of the world’s population is still offline. For many people it is a question about being able to afford a data contract – so this not just about infrastructure. As of today, these people can only use cash.
3. Resilience
   Unexpected things sometimes happen, and systems can conceivably go down. We need a contingency built into the system for a hopefully never happening situation, where standard payment rails are not available, where we have no network, maybe not even a power supply. It would make a difference if you could still pay.

So, we need CBDC payments to work offline, but won’t that be a challenge from a security perspective?

Security for most users relates to the potential theft of their money. But for central banks security is also an issue in the sense of the risks of counterfeiting in an offline scenario – where you have no back-end system to undertake verification checks.

There are technology-based solutions to these problems. However, we do not believe that secure offline payment is possible just with a standard smartphone app – especially consecutive offline payments, something we make possible with our solution G+D Filia^®.

Security is based on the entanglement of software and hardware inside a secure environment, a so-called secure element:

• It allows storage and processing of secret information in a secure way and can be used as an endpoint in an end-to-end security system
• It handles proper symmetric and asymmetric cryptography
• Both hard- and software within the secure element utilize a set of countermeasures in order to resist security attacks
• The resistance against possible attack scenarios is investigated within security certifications such as Common Criteria 

Smart cards, wristbands, smartphones, and smartwatches are sample payment devices that can utilize a secure element.

What about offline payment transparency?

Anonymity is a feature of cash – but we need a certain level of transparency to comply with regulation. So, safeguards need to be built-in for CBDCs. We also have regulations for cash.

In the transparency vs. privacy debate, you need to decide to what extent anonymity will be a feature. Whilst you cannot monitor offline transactions in real time, you can set rules and limits to what can be done. For example, you can set caps on CBDC holdings, limit the overall number of consecutive offline transactions, set full KYC for higher caps and services such as personal loss recovery.

What are the practical issues facing a CBDC in a remote area?

Physical barriers are a challenge – the onboarding of people and merchants. Addressing these barriers will vary from country to country because each has its own unique financial ecosystem and public and private institutions which can be involved.  

Whilst it is likely that central banks will distribute any offline wallets to consumer by themselves, it could be done by a commercial bank, telcos, or an e-money provider. However, in order to achieve widespread coverage, the distribution channels could be further broadened to include non-financial institutions operating within a regulated environment. These institutions might include local merchants, government agencies, or social welfare services.

Merchants could be also incentivized, for example with subsidies of POS hardware and/or software. Easy integration into existing systems is crucial.

What are the benefits and use cases with offline functionality?

We have been testing what this means in practice with G+D Filia^®. For example, our pilot in Ghana covers offline payments with smart cards, which enables real people to buy real things in a rural community. It provides a huge benefit to the people and has achieved wide acceptance.

We are convinced that offline payments are a great opportunity to narrow the digital divide. Offline payments enable micro-merchants like rural market vendors and also micro-payments for low-priced items. There’s no need for expensive devices, and CBDC payments are possible without any network connectivity – at least temporarily.

That is very inspiring. Do you have a final thought that you would like to leave us with?

Yes. If there is one thing people should understand it is that trust is the most important aspect of any currency. A CBDC must benefit all of society, and offline functionality would be a crucial part of enabling this.

Published: 27/10/2022