Capgemini makes digital currency work offline in Aussie banking pilot

Capgemini has cracked the problem of making digital currency work offline in a pilot with ANZ Bank in Australia. The test has demonstrated offline Central Bank Digital Currency (CBDC) fungibility as part of a pilot run by the Reserve Bank of Australia (RBA) and the Digital Finance Cooperative Research Center (DFCRC).

Central banks worldwide will be taking note. Capgemini has shown that banks can deploy blockchain technology and near-field communication (NFC) enabled smart cards to enable users to make instant peer-to-peer payments, even offline. Offline CBDC demands that there can be a transfer of value between devices without a connection to any digital ledger system, enabling transactions without internet or telecoms connectivity.

In an exploratory exercise, the RBA and DFCRC dug into the potential business models, economic benefits, and operational, technology, and regulatory challenges for introducing a CBDC.

Capgemini served up an offline payment business model resembling a hybrid of traditional cash and credit card transactions

The devil is in the details; the offline payments business model had CBDC behaving like a stored value card with all the functionality of the network while incorporating some of the features that users value about cash—resilience, acceptance, and offline accessibility.

ANZ Bank acted as the network provider where the fiat currency was deposited. Southern Cross University and Royal Melbourne Institute of Technology deposited fiat currency into ANZ Bank accounts in return for pilot CBDC accessible through NFC smart cards. The cards were programmed to restrict purchases to specific locations or merchants on campus. Merchants used a secure smartphone app to accept the students’ card payments (pilot offline CBDC payments) at the point of sale. The pilot involved real transactions that required participants to comply with existing regulations, which needed approvals from regulators.

The pilot demystifies the complexities of building an offline payment infrastructure

In CBDC systems, cash is represented in the form of a token, which is a cryptographic signature. In the pilot CBDC project, the NFC-enabled smart cards stored confidential information on the cryptographic signature. Participants built a card-network-like infrastructure linking the financial institution (ANZ Bank), the central bank, and the on-campus merchant application, hosted on a blockchain-based distributed ledger with robust security, as shown in Exhibit 1.

To maintain accountability and traceability of transactions, the CBDC system must go back online. At that point, the chain must be broken and the token off-loaded to the online system.

Exhibit 1: No CBDC roll-out is an island—there must be bridges connecting all the stakeholders and facilitating resilience and security

Source: Capgemini, 2023

Australia has the perfect storm for demonstrating the value potential of offline CBDC

The offline CBDC pilot use case is potentially beneficial to Australia because of the nation’s exposure to connection-disrupting natural disasters and the usual range of fraud and cyber-attacks. Central banks worldwide pursuing offline CBDC models will be watching Australia for proof of success. HFS estimates that CBDC roll-out with any meaningful launches is a good three to five years out; however, CBDC’s programmable nature and ability to exist in offline status reveal its potential and efficacy.

The Bottom Line: To innovate for success, payment providers must work with partners to pool technical resources and banking experiences.

For payment providers to succeed in an innovation-fueled payments marketplace, collaborations with service providers like Capgemini will help push the envelope to hatch new payment models.

CBDC is a long way from coming out of pilot purgatory. However, for payment providers building a dynamic payment model such as the offline CBDC, solid infrastructure with connected plumbing driven by rules and governance structure are key ingredients. Delivering this fit-for-purpose payment model requires partnerships with service providers like Capgemini to pool technical resources and experiences.