Bank of Canada experiments with offline CBDC payments

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The Bank of Canada is exploring the potential of an offline central bank digital currency (CBDC) to complement existing legal tender in the country. According to a staff analytical note released in February, the central bank says the latest experiments form part of a broader study for retail CBDCs.

The banking regulator claims that an offline CBDC will allow users to transfer digital Canadian dollars without the need for internet connections. However, certain factors must be considered before proceeding with a full-scale launch, with the duration of the offline period being paramount.

In shorter offline periods, users can transfer funds with the payee laying claim to a portion of the user’s funds that is attested to. Upon internet connectivity, settlement occurs as the CBDC system records the transaction status on the ledger. The analytical note submits that settlements in extended periods without an internet connection will require the use of a “distinct ecosystem supported by dedicated devices.”

Despite the seeming simplicity of transacting offline for extended periods, there is the drawback of requiring registration of the dedicated devices and loading funds. On the other hand, intermittent offline payments suffer the cons of funds not being able to be spent until the offline system confirms it.

The Bank of Canada notes that the widespread use of offline CBDCs will promote financial inclusion in regions without a stable internet connection and offer significant benefits over regular offerings.

“A CBDC that operates offline is more resilient than other electronic methods of payment because it does not require an internet connection. As a result, consumers can continue to transact when conventional methods, such as credit and debit cards are unavailable because of an internet failure,” the analytical note read.

Stacking functionalities on CBDCs

To allow CBDCs to compete favorably with other payment platforms, central banks are embedding several functionalities into their experiments. Top of the list for the central banks is cross-border payment functionality, a feature that several Southeast Asian countries are considering.

Furthermore, the digital yuan has been integrated with the red envelope feature to allow users to send customary Chinese New Year gifts to family and friends. Soochow Securities announced that it is now possible to use digital yuan to purchase securities, while the People’s Bank of China (PBoC) has made significant progress with contactless payments.

To learn more about central bank digital currencies and some of the design decisions that need to be considered when creating and launching it, read nChain’s CBDC playbook.

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