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The Bank of England has published its latest technical update on preparations for the potential launch of a digital pound, focused on the challenges of offline payments.

A decision has yet to be made on whether to introduce a central bank digital currency (CBDC) in the UK but the BoE, like many similar authorities worldwide, been exploring how to create what has been described as a ‘major national infrastructure project.’

The BoE described offline payments as ‘one of the most complicated elements of a potential UK CBDC’ two-and-a-half years ago, explaining in a procurement notice (for developing a proof-of-concept and doing research) that offline payments ‘could increase acceptance and resilience of CBDC but heighten the risk of double spend as there is no online connectivity to verify the provenance of the money.’

Despite its latest experimentation, offline payments continue to remain a head-scratcher for the authority’s CBDC team. ‘This project demonstrated that while it might be technically feasible to implement an offline payment functionality for a digital pound, there are trade-offs, particularly around user experience and preventing double spending and counterfeiting, that make implementing it challenging,’ the BoE states in its ‘Digital pound experiment report: Offline payments’.

The BoE’s latest experimentation involved work with five different private companies and explored four solutions. It demonstrated that ‘several’ technology choices exist that could be made for offline payments but they are dependent on policy choices such as ‘risk appetite, product proposition and liability, which impact the options available for mitigating security risks,’ the BoE summarises.

RELATED ARTICLE No ‘one-size-fits-all’ solution for offline CBDC payments: BIS handbook – a news article (11 May 2023) on a 119-page handbook produced by the Bank for International Settlements (BIS) Innovation Hub in partnership with Consult Hyperion (one of the companies engaged by the BoE for the experimentation this news article is about – see below)

Non-tech considerations excluded

The BoE and HM Treasury (HMT) are currently in a ‘design phase’ for a potential digital pound during which they aim to establish a ‘clear proposition’ for a UK CBDC. A digital pound would only be introduced with Parliament’s approval and would need primary legislation.

The central bank defines ‘offline payment’ as a payment that occurs while neither payer nor payee has access to the CBDC network, ‘usually due to the lack of an internet connection.’

In its latest experimentation, the BoE worked with Thales, Secretarium, IDEMIA Secure Transactions, Quali-Sign and Consult Hyperion to assess different offline payment solutions. Thales UK had previously been awarded a contract, valued at £100,620 (about $134,000), from January 2023 to May 2023 to deliver a ‘CBDC Proof of Concept and Research of Offline Payments’ (according to contract award notice published in April 2023 and previously reported by Global Government Fintech).

All solutions explored ‘achieved final and irrevocable payments (from a technology perspective) by transferring funds from the payer to the payee with immediate confirmation and settlement, enabling the payee to spend those funds immediately without having to reconnect to the network,’ the BoE states in the 10 April update, explaining that ‘this is often referred to as “device” offline payments.’ Other approaches exist that could also be explored, the authority adds.

The central bank points out that it explored offline payments from a technology perspective only. Other factors – such as policy, operational, legal (‘including but not limited, to the finality and irrevocability of payments from a legal perspective’) and commercial considerations – will ‘need to be’ explored, it continues, adding that ‘further work is required before design decisions can be made.’

In the same way that a decision has yet to be taken to launch a UK CBDC at all, a final decision has also not been taken on whether offline payment functionality would be implemented. A decision has been promised ‘around the middle of the decade’ – so, imminently – on whether to build a digital pound.

RELATED ARTICLE BoE publishes findings on point-of-sale testing for digital pound payments – a news story (2 June 2024) on experimentation testing the technical feasibility of using point-of-sale (POS) hardware, as currently used in the UK, for potential CBDC payments

Tech working paper: progress since

An 86-page BoE ‘Digital pound: technology working paper’, published just over two years ago (February 2023), contained a section on considerations related to offline payments.

A 33-page ‘Response to the digital pound technology working paper’, published 15 months ago (January 2024), recorded that offline functionality ‘was generally deemed to be important’. The two main reasons given were to support financial and digital inclusion, and to enhance resilience in the case of system outages. The working paper had noted that ‘the small number of respondents who did not deem offline functionality important cited security, fraud and financial crime as the reasons.’

The four solutions explored in this latest offline payments experimentation used different technologies to implement peer-to-peer and person-to-business offline payments.

‘Online reconciliation was used as a fallback security measure in all four solutions to detect counterfeiting and double spending,’ the report states. ‘Being retrospective, online reconciliation helped to detect and identify counterfeiting and double spending, but it could not prevent either. At the point at which online reconciliation happens, users would have already suffered losses.’

‘Additional countermeasures had an impact on user experience and costs,’ the report continues. ‘Measures such as risk mitigation limits had a negative impact on user experience since they prevented users from making further payments offline, often unexpectedly. There might also be financial inclusion impacts since more expensive, higher-end devices were needed to guarantee stronger security.’

RELATED ARTICLE UK CBDC architects warned against creating ‘expensive infrastructure that no-one uses’ – a report (21 March 2024) from a panel session titled ‘Stablecoins and CBDCs – what will be their impact on the payments industry?’ at last year’s ‘Pay360’ conference in London

Offline risk mitigation limits

The technology working paper stated that offline risk mitigation limits, whether on the number of consecutive offline transactions or based on time or value, might help to reduce the scale and impact of double spending.

The offline solutions assessed in this latest experimentation implemented different risk mitigation limits. Those limits included: maximum number of consecutive transactions offline; maximum offline payment amount; maximum cumulative amount for offline transactions; and maximum amount of offline balance stored.

The BoE reports, however, that ‘challenges […] arose when implementing those limits’. It explains: ‘For example, time-based limits were difficult to implement on the smart cards since those devices did not have an internal clock. But even on devices with an internal clock, for example smartphones, security concerns around trusting the clocks made time-based limits challenging to implement.’

‘We also observed potential user experience issues,’ the BoE continues. ‘For example, we needed to consider how limits would be communicated to users and whether incoming or outgoing payments would be processed when the limits were reached. Further, these limits relied on the secure element for enforcement and needed to take account of the storage constraints of the secure elements. If the secure elements were breached, those limits could also be breached.’

NFC (Near-Field Communication – short-range wireless technology) was explored. It proved ‘useful’ for card-to-phone and phone-to-card payments but ‘limited the amount of data that could be shared between payer and payee during a transaction’ and ‘revealed user experience issues.’

RELATED ARTICLE Bank of England focuses on offline payments in CBDC proof-of-concept – a news story (21 October 2022) on previous BoE use of external expertise for a project exploring the possibilities and challenges of offline CBDC payments

Policy work ‘ongoing’

The report summarises the BoE’s current perspective by stating that offline CBDC ‘would be an innovative feature with potential to support different policy goals, such as resilience or financial inclusion’. But it warns that ‘heavy reliance on secure elements meant that if the secure elements were breached, double spending and counterfeiting might occur.’

‘Secure elements are commonly used in payments today, but they are, in most cases, paired with immediate online authentication, thus limiting losses,’ the central bank explains. ‘In contrast, the online layer in an offline payment (online reconciliation) occurs only after the transaction has taken place and losses have already been incurred.’

‘Our policy work on offline digital pound payments is ongoing,’ the report concludes, adding that the central bank ‘expect[s] to conduct a policy assessment to determine what these findings might mean for a digital pound.’ It also points out that other technical-related challenges exist that were not addressed in the project, such as what happens to offline funds if a user loses their device.

The BoE kicked off 2025 on the CBDC front by reveals plans to create a ‘Digital Pound Lab’ as a ‘technology sandbox environment [to] enable hands-on experimentation’ through which it will test application programming interface (API) functionality, ‘innovative use cases’, and potential business models for payment interface providers (PIPs) and external service interface providers (ESIPs). The Lab is expected to run from August 2025 to July 2026, with its activities split into two phases (applications to participate in the first phase are open to 6 June 2025).

In a separate recent CBDC-related development, the central bank has also this month (April) published a ‘preliminary conceptual framework’ for a digital pound ‘rulebook’.

The BoE’s head of digital pound Diana Carrasco took up the role almost 18 months ago, having joined from Lloyds Banking Group. She has also previously worked at HSBC and Visa, among other companies.

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