An offline central bank digital currency (CBDC) could serve as a complement to cash, enhancing financial inclusion and safeguarding privacy, according to a recent note from the Bank of Canada.
Canada’s central bank has dedicated recent years to researching a digital dollar, exploring design features that cater to the diverse payment needs and circumstances of its citizens. In a new staff analytical note, the bank highlights substantial advancements in digital payments, yet notes that minimal progress has been made in offline transactions—physical cash remains the only widely used method that doesn’t rely on an internet connection.
Researchers are investigating two types of offline CBDC: intermittent and extended. The intermittent version would enable transactions during brief offline periods when internet access is temporarily unavailable. Conversely, the extended CBDC would facilitate payments when internet connections are consistently inaccessible or unwelcome and would necessitate specific hardware.
According to the note, an offline CBDC is more resilient than its online counterpart. For instance, users in remote areas with limited internet access could utilize a CBDC for point-of-sale purchases. Additionally, a user might prepare for disruptive events, such as an ice storm, by obtaining a CBDC while online and then storing it offline for future use.
The bank suggests that an offline CBDC could maintain the privacy typically associated with cash payments, thereby enhancing accessibility and inclusivity. This would involve structuring the CBDC as a non-registered bearer instrument, with minimal personal data linked to it.
However, researchers caution that such a design could attract malicious actors, necessitating compliance efforts with existing legislation on illicit activities.
The Bank of Canada is not alone in its exploration of offline CBDCs. Recently, the Nordic branch of the Bank for International Settlements innovation hub invited technology suppliers to propose solutions for integrating offline functionality into future CBDCs. Meanwhile, China has initiated a pilot program for its offline digital yuan, which is modeled after a standard chip and PIN credit card.
The Bank of Canada emphasizes the importance for central banks to fully understand the technology behind any extended offline solutions, as they must support the devices they issue and take on the associated risks of deployment and circulation.