Bank of England Warns: Digital Pound Offline Payments Present Significant Challenges

The design phase for a potential digital pound by the central bank is well underway, as it engages leading firms such as Thales, Secretarium, Idemia Secure Transactions, Quali-Sign, and Consult Hyperion. These collaborations are focused on evaluating the feasibility of offline payment functionality, which could significantly enhance user experience and financial accessibility.

Understanding Offline Payments

Offline payments refer to transactions where neither the payer nor the payee can access the central bank digital currency (CBDC) network, often due to a lack of internet connectivity. This capability could offer numerous advantages, including:

• Resilience: Ensures transactions can occur even during network outages.
• Financial Inclusion: Provides access to financial services for individuals in areas with limited internet access.

Challenges of Implementing Offline Functionality

The central bank has identified that while implementing offline payment functionality for a digital pound is technically feasible, several trade-offs must be considered. Key challenges include:

• User Experience: Maintaining a seamless transaction experience is crucial.
• Preventing Fraud: Addressing risks related to double spending and counterfeiting is essential.

The Role of Secure Elements

Offline payment systems heavily depend on secure elements. If these systems are compromised, there is an increased risk of double spending and counterfeiting. Unlike traditional payment systems that involve immediate online authentication, offline payments rely on a process called online reconciliation, which occurs only after the transaction is completed. This means that any losses might already have been incurred by the time the verification happens.

Technical Achievements in Offline Payments

The various technologies tested thus far have successfully facilitated final and irrevocable payments. This process allows for:

• Immediate Confirmation: Funds are transferred from the payer to the payee with instant acknowledgment.
• Immediate Settlement: Payees can utilize the transferred funds without needing to reconnect to the network.

Broader Considerations for Digital Pound Rollout

While the focus of the research has been on technological capabilities, the central bank emphasizes that multiple other factors must be evaluated before deciding on the rollout of a digital pound with offline capabilities. These factors include:

• Policy: Regulatory frameworks must support offline transactions.
• Operational: Infrastructure considerations are vital for implementation.
• Legal: Compliance with existing laws is necessary.
• Commercial: The impact on existing financial services should be analyzed.

For more information on central bank digital currencies, visit Bank for International Settlements.