Offline use of a central bank digital currency could pose more criminal risks than the use of cash, according to researchers at the Bank for International Settlements.
In a report this week, BIS authors Andrea Minto, Anneke Kosse, Takeshi Shirakami and Peter Wierts wrote that each variant of central bank digital currency — or CBDC — needs regulation appropriate to its specific risk profile.
“Offline digital euro payments could, all else being equal, pose greater anti-money laundering/combating the financing of terrorism risks compared with online digital euro payments or payments made using commercial bank deposits or hosted cryptoasset wallets,” the report read.
The comments come as European lawmakers push further towards a CBDC. European Parliament members last month backed a digital euro that would have both online and offline functionality.
More efficient than cash?
European citizens have expressed a preference for a CBDC with offline functionality for privacy reasons and for the ability to pay without an internet connection.
Offline functionality would allow users to transact without being connected to the internet, using features like near-field communication or bluetooth.
While the EU will soon limit cash payments to €10,000, lawmakers have yet to decide whether to apply a similar cap to a euro CBDC. The limit on cash transactions, set to take effect in 2027, is intended to combat money laundering.
Illicit actors could prefer using offline digital euro for illegal transfers due to the “cumbersome and less portable” nature of cash, the BIS paper noted.
“When issued for general use, retail CBDCs need to be incorporated into AML/CFT frameworks,” the report added. “The probability of detecting illicit use of retail CBDCs will likely differ for online and offline CBDC payments.”
Digital euro incoming — but no digital dollar
Lawmakers have been talking about a digital euro for years, but last month the European Parliament for the first time backed the project.
A digital euro — which will be the product of the European Central Bank — is necessary to compete with private and non-EU actors racing to digitise payments, lawmakers said.
EU lawmakers have been especially concerned by the growth of stablecoins pegged to the US dollar. A digital euro would be different to stablecoins as the European Central Bank would be the issuer. Stablecoins, meanwhile, are typically issued by private companies that have assets like US treasury bills backing the tokens in reserves.
While the EU races ahead with a CBDC, the US is unlikely to build its own — at least for now.
President Donald Trump campaigned against a CBDC, and last year signed an executive order prohibiting the establishment of a CBDC within the US.
American lawmakers this week introduced bipartisan legislation that proposes banning the Federal Reserve from issuing a CBDC until 2030.
Mathew Di Salvo is a news correspondent with DL News. Got a tip? Email at [email protected].