Previous Year Question
With reference to Central Bank digital currencies, consider the following statements:
It is possible to make payments in a digital currency without using the US dollar or SWIFT system.
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?
Only 1
Only 2
Both 1 and 2
Neither 1 nor 2
Correct Answer: C
Detailed Solution
A Central Bank Digital Currency or CBDC is the digital form of sovereign currency issued by a country’s Central Bank. In India, it is known as the Digital Rupee or e₹.
A major distinction between a CBDC and a bank deposit is that a bank deposit is a liability of the concerned commercial bank, whereas CBDC is a direct liability of the Central Bank. According to the RBI, e₹ is convertible at par with existing paper currency in a 1:1 ratio and functions as legal tender.
Statement 1 is correct.
The present cross-border payment arrangement frequently involves correspondent banks, messaging networks and, in some cases, a vehicle currency such as the US dollar. For example, a payment involving two different national currencies may first be converted into the US dollar and then into the recipient’s currency.
If interoperability or a common CBDC bridge is established between the CBDC systems of different countries, the direct exchange and settlement of their digital currencies may become possible. It can:
remove the necessity of using the US dollar as an intermediate currency;
eliminate the compulsory use of the SWIFT messaging network;
remove several layers of correspondent banking;
reduce cross-border transaction costs and settlement time; and
reduce delays arising from differences in time zones.
SWIFT itself does not settle money; it principally provides financial messaging services. A CBDC-based arrangement can create an alternative technical infrastructure for both messaging and settlement.
Statement 2 is correct.
A CBDC may possess the feature of programmability. It means that computer-coded conditions can be attached to the use of digital currency.
For example:
digital currency provided as agricultural credit may be made usable only at authorised agricultural-input stores;
government assistance may be restricted to food, fertiliser or healthcare expenditure;
a CBDC token may carry an expiry date within which it must be spent;
payment may be restricted to a particular geographical area, beneficiary category or merchant category; and
a smart contract may automatically execute payment after specified conditions are satisfied.
The RBI’s CBDC Concept Note specifically explains that tokens may carry an expiry date by which they must be spent. Thus, the “time frame for spending” mentioned in the statement is a valid example of programmability.
However, while introducing programmability, its implications for the fungibility, privacy and universal acceptability of currency must also be considered.
Additional fact: The RBI commenced the Wholesale Digital Rupee Pilot on 1 November 2022 and the Retail Digital Rupee Pilot on 1 December 2022.