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How to make central bank digital currencies work for offline payments

Date: 10 November, 2023
Governments across all continents are actively exploring the implementation of government-backed digital currencies. However, they face significant hurdles, including the critical tasks of ensuring privacy, safety, and offline usability for central bank digital currencies (CBDCs).

Is the concept of a central bank digital currency (CBDC) merely a theoretical notion? The 400,000 residents of the Bahamas might argue otherwise. In October 2020, the Bahamian government introduced the Sand Dollar, marking the world’s inaugural CBDC. The success and interest generated by this launch have been substantial. Notably, the People’s Bank of China set forth its digital yuan objectives in a July 2021 white paper, indicating the global impact of CBDCs.

China’s proactive engagement with CBDCs has spurred other nations, at a minimum, to explore the idea of state-backed digital currencies. As of September 2023, the CBDC Tracker website reports 143 CBDC projects in various stages, from research and proof of concept to pilot and launch. A notable example is Diem, the digital currency project spearheaded by Meta, Facebook’s parent company, which, despite being eventually canceled, highlighted the potential for a ‘private’ form of money on a global scale.

Addressing the challenges posed by declining cash usage and private competition, a potential solution emerges: the creation of ‘virtual’ banknotes. In this scenario, the central bank issues digital cash in the form of unique, immutable tokens stored in a digital wallet – known as CBDC. Each CBDC unit represents a claim on the central bank, akin to traditional banknotes.

The momentum behind CBDCs continues to grow, with economists increasingly recognizing the numerous benefits. The UK Bank of England, in a research paper, proposed that transactions could be conducted offline through a phone-based wallet using QR codes, NFC, or Bluetooth – all processes that can be executed locally without intermediaries. There’s even the prospect of making CBDC payments via SMS from a feature phone, requiring no internet connectivity.

Taking the concept further, there’s the intriguing possibility of CBDC payments from smart banknotes. Unveiled in 2021 by Orell Füssli, Security Printing, and AUGENTIC, smart banknotes can be exchanged like traditional cash. However, featuring encrypted 2D barcodes, holders can convert them into digital cash at any time, presenting a futuristic blend of physical and digital currency.

Key Points:

  • The Bahamas launched the Sand Dollar in October 2020, becoming the world’s first CBDC, with substantial success and interest.
  • The People’s Bank of China’s digital yuan objectives, outlined in a July 2021 white paper, have influenced other nations to explore state-backed digital currencies.
  • As of September 2023, the CBDC Tracker reports 143 projects in various stages globally, showcasing widespread interest and development.
  • Despite the cancellation of Diem, Meta’s digital currency project, it underscored the potential for a ‘private’ form of money on a global scale.
  • CBDCs, represented as unique, immutable tokens in digital wallets, offer a solution to declining cash usage and private competition.
  • Economists increasingly acknowledge the benefits of CBDCs, with the UK Bank of England proposing offline transactions through various technologies.
  • The potential to make CBDC payments from smart banknotes, featuring encrypted 2D barcodes, presents a futuristic blend of physical and digital currency.
References:

https://www.thalesgroup.com/en/worldwide-digital-identity-and-security/bank-payment/magazine/how-make-central-bank-digital

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