Bank of England focuses on offline payments in CBDC proof-of-concept

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Source: Global Government Fintech

The Bank of England (BoE) is looking to bring in external expertise for a project exploring the ‘complicated’ possibilities and challenges of offline central bank digital currency (CBDC) payments.

A decision has yet to be made on whether to introduce a CBDC in the UK and the BoE has been relatively quiet in terms of pronouncements on the topic in recent months.

But the central bank, like many similar authorities worldwide, has a growing number of team members focused on exploring the feasibility and operational considerations for what has been described as a ‘major national infrastructure project’,

A supplier opportunity has been published this week on the UK government’s ‘Digital Marketplace’, used by public-sector buyers to find technology or people to deliver digitally-focused projects, for the development of at least one proof-of-concept for offline payments in a CBDC.

‘This project will increase the Bank’s knowledge and understanding of how offline CBDC payments could work,’ the post states. ‘It will do this by building one or more proof-of-concepts to explore what the opportunities, limitations and risks associated with offline CBDC payments, while meeting policy goals of preventing AML [anti-money laundering], counterfeiting/double spend, while preserving privacy identity and increasing access.’

‘Project Rosalind’ link-up

The ‘Central Bank Digital Currency (CBDC) Proof of Concept and Research Offline Payments’ notice specifies a budget of £200,000-£250,000 (about $226,000-$283,000). The closing date for applications is 1 November, with a ‘latest start date’ of 15 November. Maximum contract length is five months. The BoE expects to evaluate three potential suppliers.

‘Offline payments are one of the most complicated elements of a potential UK CBDC and require thoughtful consideration and design. It 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,’ the notice states, which adds that no previous work has been conducted by the BoE ‘in this space’.

The notice includes seven bullet points under a headline ‘problem to be solved’. These include that the proof-of-concepts need to demonstrate how offline CBDC payments can be achieved ‘with finality and irrevocably’.

Numerous references are also made to ‘Project Rosalind’. This is a project being led by the BoE-hosted Bank for International Settlements (BIS) Innovation Hub’s London office. It aims to build a prototype of an open application programming interface (API) to enable a central bank ledger to interact with private-sector service providers to safely distribute and settle retail CBDC payments (retail CBDCs are designed to be available to the general population, whereas their digital currency siblings – wholesale CBDCs – are for inter-bank use).

‘The project team must identify the key APIs required to support offline transactions and deferred synchronisation on the CBDC core ledger for inclusion in Project Rosalind’s API specification and adapt their proof of concepts accordingly,’ states the notice, adding that proof-of-concepts need to be completed in time to be integrated into phase two of the Project Rosalind in February 2023 ‘however the final [project] report can follow after February’.

Shared concerns and priorities

Factors to be considered as the BoE decides which supplier to work with include: how well their proposal ‘demonstrates multiple offline CBDC designs for comparison’; and how much of the project’s ‘developed PoC [proof-of-concept], IP [intellectual property] and derived knowledge the Bank get[s] to keep and reuse’.

As the BoE itself states, offline payments are among the higher profile challenges facing CBDC architects worldwide.

The European Central Bank (ECB) – which has just passed the mid-point of a two-year digital euro ‘investigation phase’ into a potential digital euro – on 29 September published a report ‘Progress on the investigation phase of a digital euro’ that contains numerous references to its stance on offline payments. This update came shortly after the Frankfurt-headquartered authority concluded its search for private-sector support to develop potential user interfaces for a digital euro by appointing five companies to build prototypes. One of these – Worldline – is focusing on peer-to-peer offline payments.

Sweden’s Riksbank, which is among the major central banks most progressed in its CBDC work and has relatively close relations with the BoE through the BIS Innovation Hub network, six months ago issued a summary of its testing of a potential technical solution for a potential e-krona (its ‘E-krona pilot Phase 2’ report) including offline testing.

The BoE is already working with the Massachusetts Institute of Technology (MIT) Media Lab’s Digital Currency Initiative’ on a 12-month project to explore ‘potential technical challenges, trade-offs, opportunities and risks’ involved in designing a CBDC system

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