Prelims 2023

Q2. With reference to Central Bank digital currencies, consider the following statements:

1. It is possible to make payments in a digital currency without using US dollar or SWIFT system.
2. A digital currency can be distributed with a condition programmed into it such as a time-frame for spending it.

With of the statements given above is/are correct?
a. 1 only
b. 2 only
c. Both 1 and 2
d. Neither 1 nor 2

Question from UPSC Prelims 2023 GS Paper

Explanation : 

c. Both 1 and 2

What is Central Bank Digital Currencies (CBDCs) ?

CBDCs are digital versions of a country’s fiat currency, issued and controlled by the central bank. They can be used for transactions without involving the US dollar or the SWIFT system. The SWIFT system is an international network for financial messaging and communication between banks. CBDCs can potentially bypass this system, allowing for more direct transactions between countries and reducing reliance on the US dollar as the global reserve currency.

Digital Currency Programmability

A digital currency can be programmed with specific conditions, such as a time-frame for spending it. This is possible because digital currencies are built on blockchain technology, which allows for programmable money. Smart contracts can be used to define the conditions under which the digital currency can be spent, such as a specific time-frame or other criteria. This feature can be useful for various purposes, such as encouraging spending to stimulate the economy or targeting specific sectors for financial support.

Central Bank digital currencies - Digital Currency Programmability

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