What happens when the lights go out?

One of the great promises of central bank digital currencies (CBDCs) is that they are usable wherever paper currencies are accepted. That is, everywhere.

But like credit cards, PayPal and Apple Pay, CBDCs like China’s digital yuan or a digital dollar have one very big Achilles heel: power. They all need electricity and internet service, or at least cell service.

That makes this August headline in The Wall Street Journal very relevant: “Hurricane Ida’s power outages hamper efforts to restore cellphone service.”

The sub-headline: “Regulators say about half of cellphone towers in New Orleans remained offline nearly 48 hours after storm’s landfall.”

There is an obvious question along the lines of, “So what?”

After all, credit cards, PayPal and Apple Pay are down in those times, and people survive. Almost every CBDC is considered an addition to paper currency, not a replacement.

And current systems are not immune. The Federal Reserve’s Fedwire real-time settlement system for member institutions went down for three hours in April, and nothing crashed.

Nor did disaster follow after one of the first CBDCs, the Eastern Caribbean Central Bank’s (ECCB) DCash, went offline on January 14 and was down for weeks.

However, a private payment gateway is not the same as US currency

For one thing, a digital dollar is not a Visa card. It’s a dollar. It is, as it says just to the left of George Washington’s head on the $1 bill, “legal tender for all public and private debts.”

There is a trust aspect that will not be helped at all by a digital dollar equivalent of the Colonial Pipeline ransomware attack, which does not need to be on the actual CBDC system itself to be harmful.

See also: The three most important questions for the Fed about its CBDC plans

The core requirements for a CBDC should include “continuous service and availability, including offline functionality, to serve as an adequate backup system in the event of electricity, telecommunications or Internet network failures,” the World Economic Forum (WEF) concluded in ‘ A November white paper on “CBDC Technology Considerations.”

Offline payment problems

Leaving aside the no-access-to-your-cash part of a digital dollar outage, there is a potentially huge problem with a CBDC system that is resilient enough to be usable during times when the system is down is due to connection going offline.

“While offline capabilities improve resilience to power or connectivity outages, they can also increase vulnerability to fraud in transactions, as fewer security features and centralized controls can mitigate fraudulent behavior,” the WEF said.

It added that this “includes freezing stolen funds, querying suspicious transactions or freezing breached accounts,” as well as “potential vulnerabilities of physical devices that provide access to CBDC, such as stored-value cards.”

That’s to say nothing of mobile apps that are susceptible to everything from device hacking to phishing attacks. Mastercard and Visa generally limit liability to $50 in the event of fraud. The Federal Reserve is unlikely to do the same, especially if someone’s digital wallet password is “P@ssword.”

And you don’t have to do anything wrong to get hacked – think ATM skimmers or simply the digital wallet on your mobile phone being hacked. One concern with blockchain-based voice wasn’t just that the system could be hacked, it was that by hacking a phone, someone could install a dummy app that looked like your voice app.

To suggest that a CBDC system would be unbreakable denies reality. This is one area in which a system built on blockchain or the distributed ledger technology (DLT) underlying blockchain – international payments firm Ripple’s system is DLT-based – can provide some security. Blockchain largely eliminates double spending problems.

Also Read: Crypto’s Double Spending Achilles Heel

At the same time, it would not prevent a denial of service attack.

It’s not just technical or technology-based outages that are a problem. For one thing, about 15% of the US population does not have a smartphone that can support a digital wallet. Not only would they be debanked, they would be completely cut out of half of the legal tender system.

For another, about 18 million Americans don’t have access to broadband, according to the report “Digital Dollar Design Specifics Community Bankers Should Know” by the Independent Community Bankers of America.