Core Focus: The design of offline functionality for CBDCs, the privacy implications, the technical challenges of preventing double-spending, and the liability framework for offline transactions.

In-Depth Notes:
Offline functionality is a key feature of many CBDC designs, reflecting a commitment to ensuring that the digital currency remains accessible even without internet connectivity. This is particularly important in remote regions, during power outages or cyberattacks, and for ensuring financial inclusion . However, offline payments present significant technical and legal challenges that must be carefully addressed.

The Rationale for Offline Capability:
Offline payments are designed to provide cash-like resilience during local outages while preserving privacy for small-value payments . The justification for maintaining offline capability includes its critical role in ensuring resilience during cyberattacks or power outages, as well as its practicality in remote regions where access to electricity and internet infrastructure is limited or nonexistent . For these reasons, both the ECB’s digital euro and China’s e-CNY are being designed with offline functionality.

Technical Design of Offline CBDC:
In a hybrid account-token model, CBDC accounts can be represented by a set of public and private key pairs, which could be renewed regularly while the wallet is online to prevent user tracking and profiling when making different payments . CBDC transactions would include a chain of payer and payee signatures and the offline transaction history to ensure that the core ledger balances could be updated when the wallets went back online . This requires a trusted execution environment on the user’s device to prevent tampering or double spending .

The Double-Spending Problem:
The primary risk of offline payments is double-spending—the same digital token being spent multiple times before the ledger is updated. There would be great incentives to break trusted environments . To address this, a liability framework is required to deal with this risk when both payer and payee are offline . Some designs propose that the central bank would need to be able to track funds in order to reconstruct the offline chain of payments, though this role could also be played by other trusted third parties .

Privacy and Offline Payments:
Privacy is a central concern in offline CBDC design. Offline payments would settle directly between users, meaning neither the central bank nor PSPs would have access to data related to offline transactions . However, relying on encryption alone to protect transaction data should not be an acceptable proposition, as it had to be assumed encryption could be broken in the future . Some designs propose that transaction history would be encrypted with the central bank’s public key so that only the central bank could decrypt it . The IMF recommends that offline functionality should be carefully limited and coupled with measures to preserve traceability where necessary for AML/CFT purposes .