Sweden’s Central Bank Warns of Challenges in Offline CBDC Payments

Introduction

As central banks worldwide explore the potential of digital currencies, Sweden’s Riksbank has been at the forefront with its e-krona project. The latest phase of their pilot focuses on offline CBDC payments, a crucial aspect for ensuring usability in areas without internet access. However, the Riksbank’s recent report highlights significant challenges and technical hurdles that need to be addressed to make offline payments viable and secure.

The Importance of Offline CBDC Payments

Offline payments are essential for ensuring that a digital currency remains functional even without internet connectivity. This capability is particularly important in remote areas or during network outages, where traditional digital payment systems fail. The Riksbank’s initiative aims to create a robust offline payment solution that can seamlessly integrate with the broader financial ecosystem.

Challenges Highlighted in the Report

The Riksbank’s report on the e-krona pilot identifies several key issues related to offline CBDC payments:

• Synchronization and Security Issues: One of the primary concerns is ensuring that offline transactions are accurately synchronized with online balances. Without proper synchronization, discrepancies can arise, leading to liquidity problems in “shadow wallets” and the potential for double-spending. The report emphasizes the need for secure methods to synchronize offline payments to prevent fraud and maintain balance accuracy.
• Usability Problems: The current design for offline transactions involves multiple steps to ensure security, which can compromise user-friendliness. For example, user-to-user payments require several steps, including using both mobile phones and payment cards, which can be cumbersome and confusing for users. The Riksbank acknowledges that reducing the number of steps is challenging but necessary for widespread adoption.
• Technical Infrastructure: The pilot utilized payment cards and shadow wallets supported by R3’s Corda platform, incorporating digital certificates to secure transactions. However, the system requires a trusted and verified infrastructure before it can be officially launched. The use of self-signed certificates, while functional, may not provide the necessary security guarantees in a full-scale deployment.
• Limitations on Transactions: To mitigate risks, the Riksbank has imposed limits on offline transactions. Each card has a maximum wallet amount of SEK 3,000 (approximately $286) and can only perform five consecutive offline transactions before needing to connect to the internet. While these restrictions enhance security, they also limit the practicality of the system, particularly in scenarios requiring frequent offline payments.

Potential Solutions and Future Steps

To address these challenges, the Riksbank is considering several approaches:

• Establishing Liquidity Pools: Creating liquidity pools for offline payments could help manage the synchronization of transactions and ensure that funds are available when needed. This approach aims to maintain balance accuracy and prevent liquidity issues.
• Dynamic Card Restrictions: Adjusting the restrictions on payment cards dynamically could offer a more flexible solution. However, this would require issuing new cards whenever changes are made, adding to operational complexity.
• Enhanced Security Measures: Implementing more robust security protocols, such as hardware security modules and multi-factor authentication, could enhance the overall security of the offline payment system.

Conclusion

The Riksbank’s exploration of offline CBDC payments with the e-krona pilot underscores the complexities involved in developing a secure and user-friendly digital currency. While significant challenges remain, the ongoing research and development efforts demonstrate the central bank’s commitment to finding viable solutions. As Sweden continues its journey towards potentially adopting a digital currency, the insights gained from these pilot phases will be crucial in shaping the future of digital payments.

The success of offline CBDC payments will depend on balancing security, usability, and technical feasibility. By addressing these challenges, Sweden aims to pave the way for a resilient and inclusive digital financial system that can operate seamlessly both online and offline.