Change set
Pick exam & year, then Go.
Question map
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?
Explanation
The correct answer is Option 3 (Both 1 and 2).
Statement 1 is correct: Central Bank Digital Currencies (CBDCs) enable direct peer-to-peer transactions between nations. By using bilateral payment bridges or distributed ledger technology (DLT), countries can settle international trades without relying on the US Dollar as an intermediary or the SWIFT messaging system, which is currently the dominant global financial infrastructure.
Statement 2 is correct: CBDCs possess the unique feature of programmability. Using smart contracts, a central bank can embed specific conditions into the digital currency. This includes "purpose-bound" money or setting an expiry date (time-frame) for spending, which can be used as a monetary policy tool to stimulate consumption during economic slowdowns.
Since both statements accurately describe the functional and technological advantages of digital currencies over traditional fiat systems, Option 3 is the right choice.
PROVENANCE & STUDY PATTERN
Guest previewThis question tests the 'Functional Frontier' of a new technology. Statement 1 asks about the geopolitical utility (De-dollarization), and Statement 2 asks about the technical utility (Programmability). Standard books define CBDC, but you needed to connect it to the 'Why' (bypassing SWIFT) and the 'How' (smart contracts).
This question can be broken into the following sub-statements. Tap a statement sentence to jump into its detailed analysis.
Web source
Presence: 4/5
"a global reserve currency like the US dollar or the Euro is normally chosen as the settlement currency, mainly because at least one of these two currencies is widely available.
Because of this rea-son, this central bank is unable and/or unwilling to act as a source of liquidity"
Why this source?
- Explains that cross-border settlement typically uses a global reserve currency (US dollar or Euro) because of liquidity availability.
- Highlights that a central bank acting as settlement agent, when not issuer of those currencies, cannot readily provide required liquidity — implying difficulty avoiding USD/EUR for settlement.
Web source
Presence: 5/5
"The SWIFT network connects more than 1 1,000 financial institutions in more than 200 countries and is the main messaging network used in account-to-account cross-bor-der payments."
Why this source?
- States that the SWIFT network is the main messaging network used in account-to-account cross-border payments.
- Shows the breadth and entrenched role of SWIFT (connecting thousands of institutions in many countries), indicating it would be a major barrier to bypassing SWIFT.
Web source
Presence: 3/5
"The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves, and it serves as the unit of account of the IMF and some other international organizations, including the World Bank. Its value is based on a basket of five currencies (the US dollar, the"
Why this source?
- Presents the IMF's SDR as an alternative international reserve asset and an analogy for non‑national settlement instruments.
- Implies there are alternative settlement units (SDR) whose value is linked to a basket of currencies, offering a potential non‑USD settlement approach though not identical to CBDC.
- Explains that cross-border settlement typically uses a global reserve currency (US dollar or Euro) because of liquidity availability.
- Highlights that a central bank acting as settlement agent, when not issuer of those currencies, cannot readily provide required liquidity — implying difficulty avoiding USD/EUR for settlement.
- States that the SWIFT network is the main messaging network used in account-to-account cross-border payments.
- Shows the breadth and entrenched role of SWIFT (connecting thousands of institutions in many countries), indicating it would be a major barrier to bypassing SWIFT.
- Presents the IMF's SDR as an alternative international reserve asset and an analogy for non‑national settlement instruments.
- Implies there are alternative settlement units (SDR) whose value is linked to a basket of currencies, offering a potential non‑USD settlement approach though not identical to CBDC.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > Advantages of CBDC > p. 79
Strength: 4/5
“For example, if a commercial bank collapses, then our savings could potentially be wiped out, but this would not be the case with CBDCs, which we can hold on to our own in digital form and could be as trusted as cash.• CBDCs would be as convenient as payment apps and it also benefits from the same blockchain technology (Distributed Ledger Technology) which supports crypto currency.• Payments would be faster and easier without any delay as there is no settlement issue• Legal tender-based payment which will be efficient, trusted and regulated.• Higher seigniorage due to lower cost of printing, transportation/distribution and storing paper currency.• Introduction of CBDC would lead to a more robust, efficient, trusted, regulated and legal tender-based payments option.• E-rupee would offer features of physical cash like trust, safety and settlement facility”
Why relevant
Describes CBDCs as legal‑tender digital money, faster payments, and built on DLT — framing them as a national payment instrument that could operate differently from existing systems.
How to extend
A student could infer that if a CBDC is legal tender and uses DLT, countries might route payments bilaterally over alternate rails rather than via dollar/SWIFT and then check examples of cross‑border DLT pilots.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > Why RBI launched e-Rupee? > p. 78
Strength: 4/5
“• Many Central Banks are worried that the widespread adoption of these independent crypto currencies could weaken their control over the financial system. This could cause financial instability especially because crypto currencies do not have the legal or the regulatory safeguard that the Central Bank money does, so why not issue a digital currency of their own.• Central banks seek to meet the public's need for digital currencies, manifested in the increasing use of private virtual currencies, and thereby avoid the more damaging consequences of such private currencies.• Central banks, faced with dwindling usage of paper currency, seek to popularize a more acceptable electronic form of currency like e-rupee.”
Why relevant
Explains central banks issue digital currencies to meet public need and to retain control versus private cryptocurrencies — showing central banks’ motive and authority to create alternate payment instruments.
How to extend
One could reason that sovereign backing makes other central banks more willing to accept a CBDC in payment arrangements; compare which countries have launched CBDC pilots and whether they settled outside USD/SWIFT.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 10.Oversight of payment and settlement systems > p. 70
Strength: 5/5
“The central bank of any country is usually the driving force in the development of national payment systems. The Reserve Bank of India (RBI) as the central bank of India has been playing this developmental role and has taken several initiatives for Safe, Secure, Sound, Efficient, Accessible and Authorised payment systems in the country. In India, the payment and settlement systems are regulated by the Payment and Settlement Systems Act, 2007 (PSS Act). In terms of Section 4 of the PSS Act, no person other than RBI can commence or operate a payment system in India unless authorised by RBI.”
Why relevant
States that the central bank typically drives national payment systems and authorises payment operators, implying central banks can design cross‑border connectivity rules for a CBDC.
How to extend
Using this, a student can look for whether central banks have bilateral/ multilateral agreements or interoperable standards enabling CBDC transfers without routing through existing correspondent banking (SWIFT) links.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 13: International Organizations > 1 SDR = 0.434 US Dollar + 0.293 Euro + 0.123 Yuan + 0.076 Yen + 0.074 Pound > p. 398
Strength: 4/5
“There are no notes and coins denominated in SDRs i.e., it is not present in hard currency and is thus called paper gold or notional currency. And SDRs cannot be held by private entities. But the SDR does play a role as an interest-bearing international reserve asset. The allocation of SDRs boosts its member countries' official reserves. While SDRs cannot be used to purchase goods and services directly, countries can exchange them among themselves. Once the SDRs have been added to a member country's official reserves, the country can exchange its SDRs for hard currencies, such as US dollars, Yen, Pound, Yen, Yuan through voluntary trading arrangements with other IMF member countries.”
Why relevant
Explains SDRs are not directly usable to buy goods/services and must be exchanged for hard currencies, highlighting that international settlements often require conversion into widely accepted reserve currencies.
How to extend
A student can use this pattern to ask whether CBDCs would need conversion into reserve currencies like the US dollar for international trade settlement, or whether direct CBDC‑to‑CBDC arrangements could substitute.
Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > CRYPTOCURRENCIES > p. 160
Strength: 3/5
“A cryptocurrency is a digital money transferred over the internet. Cryptocurrencies are based on the decentralized ledger-based blockchain technology which seeks to make the currency system decentralized, unlike the present government-issued centralized form. Some popular cryptocurrencies are Bitcoin, Ethereum, etc. However, the cryptocurrencies have the following disadvantages: • These are not backed by any physical assets, unlike the gold reserve in case of fiat currencies. • It is still prone to hacking, and there have been instances of theft of Bitcoins from digital wallet, making them risky. • The anonymity in use of cryptocurrencies may actually facilitate several illegal activities like terror funding, smuggling, drugs trade, money laundering and other criminal activities.”
Why relevant
Describes cryptocurrencies as decentralized internet‑transferred money and notes cross‑border transferability (and risks), providing an example of non‑dollar digital value transfer outside traditional rails.
How to extend
One could analogise that CBDCs might combine sovereign backing with decentralised rails to permit non‑USD cross‑border payments, then check legal/treatment and technical interoperability differences between crypto and CBDCs.
Describes CBDCs as legal‑tender digital money, faster payments, and built on DLT — framing them as a national payment instrument that could operate differently from existing systems.
A student could infer that if a CBDC is legal tender and uses DLT, countries might route payments bilaterally over alternate rails rather than via dollar/SWIFT and then check examples of cross‑border DLT pilots.
Explains central banks issue digital currencies to meet public need and to retain control versus private cryptocurrencies — showing central banks’ motive and authority to create alternate payment instruments.
One could reason that sovereign backing makes other central banks more willing to accept a CBDC in payment arrangements; compare which countries have launched CBDC pilots and whether they settled outside USD/SWIFT.
States that the central bank typically drives national payment systems and authorises payment operators, implying central banks can design cross‑border connectivity rules for a CBDC.
Using this, a student can look for whether central banks have bilateral/ multilateral agreements or interoperable standards enabling CBDC transfers without routing through existing correspondent banking (SWIFT) links.
Explains SDRs are not directly usable to buy goods/services and must be exchanged for hard currencies, highlighting that international settlements often require conversion into widely accepted reserve currencies.
A student can use this pattern to ask whether CBDCs would need conversion into reserve currencies like the US dollar for international trade settlement, or whether direct CBDC‑to‑CBDC arrangements could substitute.
Describes cryptocurrencies as decentralized internet‑transferred money and notes cross‑border transferability (and risks), providing an example of non‑dollar digital value transfer outside traditional rails.
One could analogise that CBDCs might combine sovereign backing with decentralised rails to permit non‑USD cross‑border payments, then check legal/treatment and technical interoperability differences between crypto and CBDCs.
This tab shows concrete study steps: what to underline in books, how to map current affairs, and how to prepare for similar questions.
Login with Google to unlock study guidance.
Discover the small, exam-centric ideas hidden in this question and where they appear in your books and notes.
Login with Google to unlock micro-concepts.
Access hidden traps, elimination shortcuts, and Mains connections that give you an edge on every question.
Login with Google to unlock The Vault.