Offline Central Bank Digital Currencies (CBDCs) and their associated hurdles undergo examination by the Bank of England.

Offline Central Bank Digital Currencies (CBDCs) and their associated hurdles undergo examination by the Bank of England.

The Bank of England's Offline Digital Pound: A Sophisticated Solution to Counterfeiting and Double Spending

The Bank of England is exploring an innovative approach to combat counterfeiting and double spending in offline transactions, as part of its central bank digital currency (CBDC) design phase for the digital pound. This system, known as the Reserve, Pay, Settle (RPS) approach, is designed to ensure operational resilience and cash-like convenience, even in limited or no connectivity environments.

The primary line of defense against counterfeiting and double spending in the offline CBDC is the cryptographic keys used within the secure element of the device. When making offline payments, the payer creates a cryptographically signed digital IOU that the payee can validate offline. This IOU can be used for further offline payments, and once either party goes online, these IOUs are synchronized and validated through a central gateway against the ledger before final settlement.

Key features of the RPS offline design include usability, prevention and detection of counterfeits, and double spending prevention. The system allows transactions to occur offline without internet connectivity, making it suitable for remote areas or network disruptions. Cryptographic signatures authenticate IOUs, making forgery difficult, and ensuring only valid digital currency is used. The digital IOUs accumulate offline but must be reconciled and validated online through a gateway that confirms the payer’s digital wallet had sufficient reserved value before committing the payment on the central ledger.

The Bank of England has tested solutions from various providers, including Thales, Secretarium, IDEMIA Secure Transactions, Quali-Sign, and Consult Hyperion, to ensure the technical feasibility of this approach. However, challenges remain. Offline and online CBDC balances are kept separate in the wallet, which might be found odd by users who don't care about the technical ramifications. The limited storage capacity of secure elements caps the number of transactions possible before reconnecting to the network, and imposing transaction limits can impact usability.

Another challenge is the detection of counterfeits and double spending without transaction records to reconcile with the online ledger. Devices can keep transaction records for later reconciliation, with possibilities being full, partial, or no records. Confidential computing was used to protect personal data during the upload of offline transaction data.

The trials also allowed for additional checks, including for money laundering. However, there are still two major areas where work is needed: double spending and fraud checks, and what happens if the secure element is compromised.

While the Bank of England recently considered shelving the digital pound project due to evolving payment innovations in the private sector, the RPS offline design represents a sophisticated solution addressing practical usability and security challenges crucial for retail CBDCs. This approach generalizes and builds upon comparable offline CBDC solutions trialed internationally, such as Sweden’s e-krona project and the MIT Digital Currency Initiative’s OpenCBDC two-phase commit architecture.

1. The Bank of England's Reserve, Pay, Settle (RPS) approach for the digital pound, which is a part of the central bank digital currency (CBDC) design phase, aimsto provide operational resilience and cash-like convenience, even in limited or no connectivity environments.
2. Harnessing cryptographic keys within secure elements of devices, the RPS offline design allows transactions to occur offline without internet connectivity and ensures only valid digital currency is used by authenticating IOUs, making forgery difficult.
3. Industry leaders like Thales, Secretarium, IDEMIA Secure Transactions, Quali-Sign, and Consult Hyperion have collaborated with the Bank of England to test their solutions, enhancing the confidence in the technical feasibility of the offline CBDC approach.
4. Despite advancements in the RPS offline design, challenges regarding user experience, limited secure element capacity, counterfeit and double spending detection, and potential security breaches persist, requiring further industry insights and innovations in finance and technology.

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