In the evolving digital global economy, central bank digital currencies (CBDCs) — digital sovereign currency, issued and regulated by a nation’s central bank — have promised to enhance payment efficiency, reduce transaction costs and strengthen monetary policy implementation.
But while online CBDCs have garnered significant attention, the potential of offline CBDCs — digital currencies operable without constant internet connectivity — remains largely unexplored. It’s imperative that policy makers turn their attention to this untapped potential.
The promise of offline CBDCs is particularly pronounced in countries such as India. A substantial portion of the country’s population resides in regions with poor internet connectivity. That limits access to banking services, which makes it harder to adopt digital payment platforms that require constant connectivity. Infrastructural limitations and lower levels of digital literacy further hamper access to the benefits of the digital economy.
By enabling digital transactions without continuous internet connectivity, offline CBDCs can extend financial services to remote and underserved regions. Users can conduct secure, peer-to-peer transactions using digital currency stored on devices such as smart cards or mobile wallets, which synchronize with the central system once connectivity is restored. Implementing offline CBDCs would thus empower rural people while reducing reliance on cash transactions.
Moreover, offline CBDCs could enhance the resilience of payment infrastructure by ensuring the continuity of financial services during network outages or emergencies. India is prone to natural disasters such as floods and earthquakes, which can disrupt communication networks and financial infrastructure. With offline CBDCs, financial transactions could continue uninterrupted during such events, allowing individuals and businesses to access essential goods and services. For farmers, it would mean timely payments for their produce; for small businesses, efficient transactions with suppliers and customers; and for women, greater financial autonomy and security. Taken together, these benefits suggest offline CBDCs could be an important driver of growth, income equality and poverty reduction.
India thus presents a compelling case for integrating offline CBDCs into its current digital public infrastructure. That case is all the more compelling when one considers that innovations such as the Unified Payments Interface (UPI) system, which facilitates seamless transactions between bank accounts via mobile devices, and the Aadhaar digital identity card system, which uses biometric authentication to enhance security and accessibility, are already in place.
To seamlessly integrate offline CBDCs with existing digital platforms such as UPI and Aadhaar, interoperability will be crucial. Technical standards need to be established to ensure that offline CBDC wallets can communicate with other payment systems once connectivity is restored, for example.
This requires developing protocols that allow for the synchronization of offline transactions with the central ledger without compromising security. In addition, robust encryption and secure hardware elements in devices are essential to safeguard against unauthorized access and counterfeit currencies. Collaboration between the Reserve Bank of India (RBI), payment service providers and technology firms will be vital to creating a secure and interoperable ecosystem.
Further, regulatory frameworks will need to mandate stringent authentication processes to prevent fraud and double spending, especially given the offline nature of transactions. The government will need to establish clear guidelines on data collection, storage and sharing practices to protect sensitive personal and financial information from breaches and misuse.
For the RBI, financial stability considerations include managing the impact of CBDCs on monetary policy transmission and banking sector liquidity. Conducting comprehensive risk assessments and developing contingency plans to address potential systemic risks are also essential steps.
Establishing independent oversight bodies to monitor compliance and address grievances can further strengthen governance. Transparent policies and open communication with the public will be crucial to fostering trust in the new system. By prioritizing data privacy and robust governance, India could ensure that the integration of offline CBDCs enhances its digital public infrastructure without compromising individual rights or economic stability.
By leveraging existing digital frameworks, integrating offline capabilities for CBDCs and developing a hybrid system that operates both online and offline, India can ensure that the benefits of digital currencies are accessible to all its citizens. Success in this endeavour could pave the way for adoption by other countries in the Global South facing similar challenges, serving as a model for extending digital financial services to underserved populations worldwide.
This piece first appeared in The Hindu Business Line.
