With reference to Central Bank digital currencies, Consider the following statements.

UPSC Prelims 2023 Question:

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.

Which of the statements given above is/are correct?

a) 1 only

b) 2 only

c) Both 1 and 2

d) Neither 1 nor 2

Correct Answer: Option c) Both 1 and 2

Learn more about the Central bank digital currencies in India.

Explanation:

• Central bank digital currencies (CBDCs) are a form of digital currency issued by a country's central bank. They are similar to cryptocurrencies, except that their value is fixed by the central bank and equivalent to the country's fiat currency.
• Countries will be able to directly exchange digital currencies in a bilateral way and without going through SWIFT or similar settlement systems. So, statement 1 is correct. 
• A CBDC is programmable to the point that the currency can be made to expire, thus forcing consumers to use it up to a certain date. So, statement 2 is correct. 

Significance of Central Bank Digital Currency

• It would reduce the cost of currency management while enabling real-time payments without any inter-bank settlement.
• India’s fairly high currency-to-GDP ratio holds out another benefit of CBDC to the extent large cash usage can be replaced by (CBDC), the cost of printing, transporting and storing paper currency can be substantially reduced.
• It will also minimize the damage to the public from the usage of private virtual currencies.
• It will enable the user to conduct both domestic and cross border transactions which do not require a third party or a bank.
• It has the potential to provide significant benefits, such as reduced dependency on cash, higher seigniorage due to lower transaction costs, and reduced settlement risk.
• It would also possibly lead to a more robust, efficient, trusted, regulated and legal tender-based payments option.

Therefore, option (c) is the correct answer. 

Subject: Economics | Money and Banking

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