Question 74 from UPSC CSE 2023 - Current Affairs

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 the 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?

IASCODEX · Accepted Answer

Correct Option: C. Both 1 and 2

Strategy: Identify and highlight the functional advantages of Central Bank Digital Currencies (CBDCs). These include their ability to bypass traditional international settlement systems such as SWIFT and reduce reliance on the US dollar for digital transactions. Additionally, emphasize that CBDC infrastructure supports programmability, allowing for embedded restrictions like time limits on spending.

Key Info: Central Bank Digital Currencies (CBDCs) are digital forms of a nation's fiat currency issued and regulated by the central bank. They are distinct from cryptocurrencies in that they are legal tender and centrally controlled.

### International Transfers and SWIFT
CBDCs potentially allow for cross-border payments directly between parties without the need for traditional intermediaries such as SWIFT (Society for Worldwide Interbank Financial Telecommunication). SWIFT is a global messaging network for international monetary transactions, often relying on the US dollar as a reserve and settlement currency. CBDC systems can enable direct digital settlements in sovereign currencies, bypassing SWIFT and US dollar mediation.

### Programmability of Digital Currency
CBDCs are programmable money, which means central banks or authorized institutions can embed code-based conditions on their use. These conditions may include restrictions such as expiry dates, location-based usage limits, or permitted merchant categories. This feature can facilitate targeted policy initiatives such as time-bound stimulus payments, restricted-purpose subsidies, and anti-fraud measures.

### Associated Global Experiments
Nations like China (Digital Yuan), the Bahamas (Sand Dollar), and the European Union (Digital Euro pilot) are exploring or have implemented programmable features in CBDCs. The Reserve Bank of India has also launched pilot projects for the Digital Rupee.

### Implications
Such capabilities in CBDCs may alter global payment architectures and lessen dependence on dollar-based settlement networks, increasing autonomy and policy efficacy for central banks.

### Legal and Technical Aspects
Programmability arises from blockchain or distributed ledger technology but may also be implemented on centralized databases. Regulatory and privacy frameworks vary across jurisdictions.

IASCODEX · Answer

Option A: 1 only

IASCODEX · Answer

Option B: 2 only

IASCODEX · Answer

Option D: Neither 1 nor 2