Offline Central Bank Digital Currency's hurdles examined by the Bank of England
Bank of England Explores Offline Central Bank Digital Currency (CBDC) Solutions
The Bank of England has been conducting trials to explore the potential challenges and solutions for an offline CBDC system, with a focus on usability and fraud prevention.
Usability and Fraud Prevention Challenges
The trials concluded that there are significant security, performance, and user experience challenges that need to be addressed. One of the issues users might find odd is the separation of offline and online balances due to the technical ramifications.
Potential Solutions
To address these challenges, potential solutions include a combination of pre-offline mechanisms, cryptographic controls, and transaction reconciliation strategies.
- Pre-offline Reservation of Funds: Offline wallets are assigned a reserved value on the online ledger beforehand, limiting the offline payment amount to what is backed by existing online account balances. This prevents overdrafts or the creation of tokens out of thin air.
- Cryptographically Signed Digital IOUs: When initiating an offline payment, the payer’s wallet generates a cryptographic proof (a digital IOU) that the payee’s wallet can verify, reducing the risk of counterfeit payments during offline transfer.
- Transaction Chain Reconciliation Upon Reconnect: Although offline devices cannot always verify authenticity in real-time, once devices go back online, they synchronize and reconcile transaction chains to detect fraud events such as double spending or the creation of counterfeit tokens.
- Limiting Offline Transaction Propagation: By placing limits and controls on how offline transactions propagate or accumulate, systems can mitigate the risk of issuing counterfeit tokens through prolonged offline use or transaction chaining.
- Balancing Usability and Fraud Risk: Usability trials emphasize ease of use in offline scenarios, but fraud prevention requires layered technical controls and back-end reconciliation, which need to be carefully balanced.
- User Trust and Privacy Considerations: Surveys show that users prioritize ease of use, fraud protection, and offline functionality, while also valuing privacy and trust in the issuing central bank, which can influence acceptance and adherence to security protocols.
Hybrid Model Recommended
In summary, the Bank of England’s offline CBDC trials and related research recommend a hybrid model combining cryptographic offline transaction signing, pre-reserved spending limits, and post-transaction reconciliation once devices reconnect online to offset the usability–fraud prevention tradeoff inherent in offline CBDC operations.
The solutions tested are capable of delivering final payments, but challenges related to usability and the prevention and detection of counterfeits and double spending were found. The Bank of England is continuing to explore these issues, particularly in relation to double spending and fraud checks, and what happens if the secure element is compromised.
The primary line of defense against counterfeiting and double spending is the cryptographic keys used within the secure element of the device. Offline transactions can keep full, partial, or no records for later reconciliation. Various privacy-preserving technologies were tested to safeguard personal information.
Offline payments tend to use secure elements on smartphones, special SIMs, or smart cards, which have limited storage capacity. This caps the number of transactions possible before reconnecting to the network. Offline and online CBDC balances are kept separate in the wallet. Trials tested a centralized system for uploading offline transaction data, with confidential computing used to protect personal data during uploads. Additional checks, including for money laundering, were possible with the centralized system.
The offline CBDC design phase is currently focusing on technology issues. Without transaction records, it’s not possible to detect counterfeits and double spending. Imposing transaction limits to address potential risks has a side effect of impacting usability. Solutions provided by Thales, Secretarium, IDEMIA Secure Transactions, Quali-Sign, and Consult Hyperion are being tested.
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