CBDC Can Enhance Financial Inclusion with cash like features, Privacy, And Disaster Readiness

By: Mark Jessy

January 02, 2021 7:15 AM


In a recent report by forbes, Cash is the most familiar form of central bank currency. Cash is just one form of money. Money is a three legged construct, a numeraire (or unit of account) used for quoting prices,  a medium of payment and a store of value. For most retail uses, the forms of money include commercial bank deposits and cash.  


The issuance of cash by the central bank is an expression of monetary sovereignty.  Commercial bank deposits are already digital and widely used through debit cards and indirectly through credit cards.

A digital version of cash can provide a modern public payment alternative. 80% of central banks are working on central bank digital currency according to a Bank of International Settlement survey from January 2020. Now the percentages are probably higher.


Cash has many positives. One of its greatest negatives, its physicality, causes cash to require physical presence to spend. It is also a mark of its greatest positive, cash is an anonymous token, physical possession is enough to ensure the ability to use cash. Two other properties are notable, cash can work in an offline setting, a formal bank account is not needed  to hold and spend cash. All of these effects are interrelated.  


This is one of the greatest challenges for CBDCs, physical limitations are taken away, but the ability to function in an offline setting and privacy have to be solved. An analogue of physical possession has to be re-introduced into the digital sphere to address these questions. The proposed solutions run the gamut from smart bank notes to mobile devices and smart cards. Smart bank notes have the form factor of a regular bank note. A solution for peer-to-peer offline payments is described in a paper published by Visa V. Such a scheme addresses only the occasional offline-capabilities of a retail CBDC. These solutions can be the launching pads for privacy as well as financial inclusion with alterations.  

Visa proposes a two-tier hierarchical infrastructure, undergirded by public-key cryptography. Public Key Infrastructure (PKI), with its familiar Certificate Authority(CA) and intermediate CAs creating a chain of trust that terminates at the edges is the core idea. The central bank is the root CA for generating digital signatures, other financial institutions function as intermediate certificate authorities. These are the two tiers.


These institutions on-board customers and provision their devices. The offline capability enables secure peer-to-peer offline payments using verified and certified hardware. A offline payment system (OPS) protocol for CBDC enables instant payments through a point-to-point channel without any intermediary. Consistency with the accounting system  is achieved when reconnection to the network happens. Due to the decentralized nature of these payments, each payment can be done in real time and creates an elastic and scalable system for payments.


The absence of intermediaries causes a double spend problem due to the absence of a global witness. The paper discusses how such a problem is solved due to the security of an offline protocol running on trusted hardware.

Notwithstanding all this, there are several limitations with this scheme. Some are noted in paper: the ability to counterfeit CBDC has a strong incentive and hence will attract the attention of criminals and state actors; such an ability can be replicated frictionless compromising the whole system (they call this an inability to gracefully degrade- the whole system may have to be shutdown to protect against large scale failure) ; recovery of funds due to loss of device through theft, damage or loss  is impossible. One of the others relates to readiness, the offline balance on the protected device has to be created during an online session.


Since emergencies and crises happen without warning, such a contingency needs planning and forethought; not everyone’s forte. A behavioral tweak would be to support a wallet feature that segregates a set percentage or a fixed amount into offline storage every-time it detects a stable connection to the dispensing server.    


The reason for an offline interaction can be a result of a planned trip to a location where there is no internet, residence in an unconnected location or a loss of connectivity due to a natural disaster. The efficacy of such a system will depend on several factors like the size, extent and resilience of  such a payment network. In other words, are there people willing to accept payments in the offline setting and how long and how wide the disaster driven disconnection lasts.


An independent and decentralized system with solar or mini hydro-electric generation capability can also create a resilient system that can protect users from the dangers to a nation-wide grid outage due to a solar storm or a deliberate cyber-attack. Some powered devices are necessary to run these cryptographic protocols.