The offline payment feature is sought after by many central banks that are contemplating their CBDC projects. Central Bank of Japan has published a paper on the issue that includes a technical explanation in Section 4. (Although the paper is not in English, Google translate is helpful to understand it, at least to some extent.)
Before the offline payments issue, I want to mention how contactless payments work: Contactless payments are achieved by using a Trusted Execution Environment (TEE*) in devices that also include Near Field Communication (NFC**) hardware. TEE provides a secure software space within the device, while NFC hardware makes it possible to transfer data (and money) between two devices by just holding them close to each other.
If the devices are not online, payments can be processed within pre-set time and amount limits and suspended until one of the devices reconnects to the internet. Until then, the information is stored in a sort of intermediate memory. Though some resources claim that this method contains an offline verification process, the Visa paper mentioned below -along with other resources-, shows that it is not possible without special hardware designed for offline verification of tokens. Another possibility is using a phone line network -instead of the internet- for payment processing. This method still requires to be online, but this sort of "line" has more coverage and it doesn't require a smart device or an internet connection at all. An example of this possibility is the CBDC issued and tested by Uruguay in 2017-2018. (see pages 18 and 89 here.) Phone lines have been used widely in Africa for mobile money transactions as well. This method does not require relatively expensive devices and helps to achieve higher rates of financial inclusion.
A Chinese bank (ICBC) seems to have developed three patents in the last five years to make "dual offline payments" of DC/EP possible. This feature of the Chinese CBDC was tested during the second pilot in December 2020.
The main challenge for the offline payment feature is the risk of double-spending. As I mentioned, TEE and NFC are not enough to solve this problem, though they are useful for contactless payments. Visa Research's paper offers reliable hardware to solve the problem. An OMFIF paper in collaboration with IBM also indicates a similar "specialized hardware" solution here on page 26. A problem may be developing a universal or interoperable hardware that works compatible with all CBDCs that may have different protocols.
A nice review of the issue by Rafael Belchior with a focus on this solution can be found here: CBDC-Powered Offline Payment Systems — A True Rival to Cryptocurrencies?
Lastly, here are two definitions to understand contactless (before offline) payments:
*Trusted Execution Environment: There are lots of software or applications in the electronic/mobile devices we use and that creates an insecure environment with several vulnerabilities in these devices. TEE offers a space for executing codes which provides a higher level of security for trusted applications running on the device. More information here.
**Near Field Communication (NFC): NFC allows two devices placed within a few centimeters (usually less than 4 cm.s) of each other to exchange data -such as contacts, links, photos- as well as digital money. Both devices must be equipped with an NFC chip for this exchange. With this technology, an NFC device can be used as a contactless credit card. Apple Pay and Android Pay use this technology, for example.
