Detailed Explanation:

Answer: Option 3 — Both 1 and 2

Central Bank Digital Currencies (CBDCs) enable direct cross-border transactions between central banks without requiring the US dollar as an intermediary or the SWIFT messaging system. Additionally, CBDCs can be programmed with smart contracts to impose conditions such as expiration dates or restrictions on usage, making them 'programmable money.'

✅ Statement 1 – Correct: CBDCs allow peer-to-peer cross-border payments through bilateral arrangements or common platforms between central banks, bypassing the need for US dollar or SWIFT system.
✅ Statement 2 – Correct: CBDCs can be programmed with conditions like time-bound spending or purpose-specific use (e.g., subsidies), making them programmable digital currency.

📝 Short Notes: Central Bank Digital Currencies (CBDCs)

• Definition: CBDCs are digital forms of fiat currency issued and regulated by a country's central bank, representing legal tender in digital format.
• Types: Retail CBDCs (for public use) and Wholesale CBDCs (for financial institutions and interbank settlements).
• Programmability: CBDCs can incorporate smart contracts enabling conditional payments, time-bound spending, and purpose-specific usage restrictions.
• Cross-border Transactions: Enable direct central bank-to-central bank settlements, reducing dependency on correspondent banking, SWIFT, and US dollar as reserve currency.
• India's Digital Rupee (e₹): RBI launched pilot projects for both wholesale (e₹-W) and retail (e₹-R) CBDCs in 2022-23.
• Advantages: Reduced transaction costs, financial inclusion, transparency, real-time settlement, and enhanced monetary policy transmission.
• Challenges: Privacy concerns, cybersecurity risks, impact on commercial banks' deposit base, and technological infrastructure requirements.