With reference to Central Bank digital currencies, consider the following statements:
- It is possible to make payments in a digital currency without using US dollar or SWIFT system.
- A digital currency can be distributed with condition programmed into it such as a time-frame for spending it.
Which of the statements given above is/are correct?
- 1 only
- 2 only
- Both 1 and 2
- Neither 1 nor 2
Explanation
Statement 1 is correct
- Alternatives to SWIFT and the U.S. dollar are coming from two directions: cryptocurrencies and central bank digital currencies. Through CBDCs, countries will be able to exchange digital currencies bilaterally without going through SWIFT or similar settlement systems. CBDCs can lower transaction costs and increase accessibility/financial inclusion, as they can be designed either as a direct claim on the issuing central bank or as a form of digital cash that can be transferred peer-to-peer without going through a bank.
| Cryptocurrencies | Central Bank digital currencies |
| Private companies or individuals generally run cryptocurrencies. | CBDC is controlled and tracked by a country’s central bank and corresponds to that country’s fiat currency. |
| Bitcoin’s price may vary by hundreds or even thousands of dollars in a short period of time due to speculations. | A CBDC issued by the Central Bank would (ideally) be worth as much as its physical counterpart. |
| Investors often buy large quantities of Bitcoin or other cryptocurrencies and hold them in the hope of making a profit. | CBDCs are not meant to be investment vehicles. |
| Cryptocurrencies and CBDCs are both blockchain-based digital currencies. | |
Statement 2 is correct
- A digital currency can be distributed with a condition programmed into it such as a timeframe for spending it. For example, China has been exploring expiration dates with its digital yuan, or DCEP (It is the digital version of the yuan, China’s physical currency). Which means the currency will expire if not used in a certain timeframe.
