UPSC CSE Prelims 2023
(c) Central Bank Digital Currencies (CBDCs) are a digital form of a country's fiat currency, issued and regulated by the central bank.
Statement 1 is correct: CBDCs are designed to be a direct liability of the central bank. This characteristic allows them to facilitate cross-border payments directly between central banks or users without necessarily relying on traditional intermediary systems like SWIFT or the US dollar for settlement. This can potentially reduce transaction costs and time, enhancing efficiency in international transactions.
Statement 2 is correct: CBDCs can be designed with programmability features. This means that specific conditions or rules for their usage can be embedded into the digital currency itself. Examples include setting a time limit for spending the currency, restricting its use to particular sectors or purposes, or even programming an expiry date to encourage consumption or achieve specific policy goals.
Option (a) is incorrect because while statement 1 accurately describes a feature of CBDCs, statement 2 is also correct regarding their programmability.
Option (b) is incorrect because while statement 2 accurately describes a feature of CBDCs, statement 1 is also correct regarding their potential to bypass traditional payment systems.
Option (d) is incorrect because both statement 1 and statement 2 accurately describe features and potential applications of Central Bank Digital Currencies, making them correct.