Digital Currencies - TOEFL Reading Practice Test

For scoring well in the TOEFL iBT^® exam, it is imperative to master the academic texts in English, especially while attempting the TOEFL Reading section. Candidates are being assessed based on certain skills like identifying text structure, highlighting details, making inferences, and also identifying the structure of the text. It is essential to identify the challenges of reading in English in an academic environments to prepare for the exam.

Our practice tests such as the TOEFL Practice Test centered on the passage 'Digital Currencies' would help the test taker to acquire the knowledge about the structure as well as the exam format. So, join us and familiarise yourself by taking the test and boost your confidence level to attempt the Reading section.

Reading Instructions:

• You have 15 minutes to read the following passage and answer all 9 questions related to it.  
• Most questions are worth 1 point. The directions indicate how many points you will receive for that specific question. 
• The specific section/paragraphs have been provided again with the question for ease of understanding and quick solution.
• Some questions include a word or phrase that is highlighted in the question as well as in the paragraph for quick reference. 

The rise of digital currencies marks a major change in the global financial landscape. Starting with Bitcoin in 2009, digital currencies have changed from unclear tech innovations into important financial tools. These currencies exist only in electronic form and use secure methods to protect transactions, control the creation of new units, and verify asset transfers. The technology behind them, called blockchain, acts as a distributed ledger that records all transactions across a network of computers. This decentralization improves transparency and lowers the risk of fraud, attracting attention from investors, regulators, and financial institutions. As digital currencies become more popular, their effects on the future of money and traditional banking systems grow increasingly important.

One of the most interesting features of digital currencies is their potential to shake up traditional banking systems. Different from regular currencies, which are issued and regulated by central banks, digital currencies operate independently of any central authority. This decentralization allows for direct transactions between users without middlemen like banks or payment processors. As a result, digital currencies can help enable faster and cheaper cross-border transactions, which is especially helpful for people in developing countries who may not have access to traditional banking services. For example, sending money through digital currencies can significantly lower transaction fees compared to conventional money transfer services. This ability not only improves financial access but also helps individuals manage their finances more effectively.

But the growth of digital currencies has sparked dispute. Critics argue that their built-in anonymity and lack of regulation can facilitate illegal activities, such as money laundering and tax evasion. The instability of digital currencies, emphasized by Bitcoin's dramatic price swings, raises concerns about their reliability as stable stores of value. Additionally, the environmental impact of cryptocurrency mining, which requires a lot of computing power and energy, has led to debates about long-term viability. So, regulatory bodies around the world are trying to assess how to effectively oversee digital currencies while still encouraging new ideas. Some countries, like China, have chosen to ban them outright, while others, such as the United States, are exploring ways to integrate digital currencies into their financial systems.

In response to the challenges posed by cryptocurrencies, central banks have begun looking into Central Bank Digital Currencies (CBDCs). Unlike cryptocurrencies, which are decentralised and often anonymous, CBDCs would be issued and regulated by central banks, keeping the stability and trust associated with traditional fiat currencies. Supporters of CBDCs argue that they could improve financial inclusion by providing a secure and easy way to pay for people who don't have bank accounts. Also, CBDCs could make it easier for central banks to implement financial policy, allowing them to respond more effectively to economic changes. Countries like China and Sweden are already running pilot programmes to assess the practicality and implications of CBDCs, which could reshape the future of monetary transactions.

The integration of digital currencies into the global economy raises important questions about the future of financial policy. As digital currencies become more popular, central banks may need to rethink how they approach interest rates, controlling inflation, and maintaining currency stability. The emergence of a parallel digital currency system could challenge the effectiveness of traditional financial policy tools, as people may prefer to hold digital currencies instead of fiat currencies. This shift could lead to less demand for central bank money, complicating efforts to maintain economic stability. So, economists and policymakers are increasingly discussing how to adjust existing frameworks to accommodate the rise of digital currencies, with some suggesting a hybrid model that includes both traditional and digital currencies.

In conclusion, the evolution of digital currencies presents both opportunities and challenges for the global financial system. While they offer the potential for greater efficiency and accessibility in financial transactions, concerns about regulation, instability, and environmental impact need to be addressed. The exploration of CBDCs by central banks shows a recognition of the need to adapt to this fast-changing landscape. As digital currencies continue to evolve, their implications for financial policy, financial inclusion, and the future of money will remain topics of ongoing discussion and debate. Ultimately, the effect of digital currencies on the global economy will depend on how well parties manage these complexities, take advantage of potential benefits, and reduce associated risks. Questions still exist about the long-term sustainability of digital currencies and their role in shaping the future of financial systems around the world.

Directions: Once you have read the passage, answer the following questions.

Paragraph 1 

The rise of digital currencies marks a major change in the global financial landscape. Starting with Bitcoin in 2009, digital currencies have changed from unclear tech innovations into important financial tools. These currencies exist only in electronic form and use secure methods to protect transactions, control the creation of new units, and verify asset transfers. The technology behind them, called blockchain, acts as a distributed ledger that records all transactions across a network of computers. This decentralisation improves transparency and lowers the risk of fraud, attracting attention from investors, regulators, and financial institutions. As digital currencies become more popular, their effects on the future of money and traditional banking systems grow increasingly important.

1. According to paragraph 1, what is the primary technology that underpins digital currencies?   
   1. Blockchain 
   2. Central banking 
   3. Electronic wallets 
   4. Traditional banking systems 

1. In paragraph 1, each of the following is mentioned as a characteristic of digital currencies EXCEPT: 
   1. They exist only in electronic form.
   2. They are regulated by central banks. 
   3. They use secure methods to protect transactions. 
   4. They improve transparency and lower the risk of fraud. 

Paragraph 2

One of the most interesting features of digital currencies is their potential to shake up traditional banking systems. Different from regular currencies, which are issued and regulated by central banks, digital currencies operate independently of any central authority. This decentralisation allows for direct transactions between users without middlemen like banks or payment processors. As a result, digital currencies can help enable faster and cheaper cross-border transactions, which is especially helpful for people in developing countries who may not have access to traditional banking services. For example, sending money through digital currencies can significantly lower transaction fees compared to conventional money transfer services. This ability not only improves financial access but also helps individuals manage their finances more effectively.

1. What can be inferred from paragraph 2 about the impact of digital currencies on developing countries? 
   
   1. They may worsen financial access for individuals. 
   2. They could provide a more efficient means of transferring money. 
   3. They are likely to be banned in developing countries. 
   4. They will replace traditional banking systems entirely. 

1. Why does the author mention the example of lower transaction fees in paragraph 2?
   
   1. To illustrate the inefficiency of traditional banking systems 
   2. To highlight the advantages of digital currencies for users 
   3. To argue against the use of digital currencies
   4. To suggest that digital currencies are only beneficial for wealthy individuals 

Paragraph 3

But the growth of digital currencies has sparked dispute. Critics argue that their built-in anonymity and lack of regulation can facilitate illegal activities, such as money laundering and tax evasion. The instability of digital currencies, emphasised by Bitcoin's dramatic price swings, raises concerns about their reliability as stable stores of value. Additionally, the environmental impact of cryptocurrency mining, which requires a lot of computing power and energy, has led to debates about long-term viability. So, regulatory bodies around the world are trying to assess how to effectively oversee digital currencies while still encouraging new ideas. Some countries, like China, have chosen to ban them outright, while others, such as the United States, are exploring ways to integrate digital currencies into their financial systems.

1. In paragraph 3, the word "facilitate" is closest in meaning to:  
   1. Hinder
   2. Promote
   3. Complicate
   4. Ignore

1. Which of the following sentences best expresses the essential information in the following text from paragraph 3?

 "Critics argue that their built-in anonymity and lack of regulation can facilitate illegal activities, such as money laundering and tax evasion."   

1. 1. Critics believe that digital currencies can lead to illegal activities due to their anonymity. 
   2. Critics think that digital currencies are completely safe and regulated. 
   3. Critics argue that digital currencies are only used for legitimate transactions.
   4. Critics claim that digital currencies have no impact on illegal activities. 

Paragraph 4

In response to the challenges posed by cryptocurrencies, central banks have begun looking into Central Bank Digital Currencies (CBDCs). Unlike cryptocurrencies, which are decentralised and often anonymous, CBDCs would be issued and regulated by central banks, keeping the stability and trust associated with traditional fiat currencies. Supporters of CBDCs argue that they could improve financial inclusion by providing a secure and easy way to pay for people who don't have bank accounts. Also, CBDCs could make it easier for central banks to implement financial policy, allowing them to respond more effectively to economic changes. Countries like China and Sweden are already running pilot programmes to assess the practicality and implications of CBDCs, which could reshape the future of monetary transactions.

1. What is the main purpose of paragraph 4?   
   1. To discuss the potential benefits of CBDCs 
   2. To argue against the use of cryptocurrencies 
   3. To explain the history of digital currencies 
   4. To highlight the challenges faced by traditional banking 

Paragraph 5

The integration of digital currencies into the global economy raises important questions about the future of financial policy. As digital currencies become more popular, central banks may need to rethink how they approach interest rates, controlling inflation, and maintaining currency stability. The emergence of a parallel digital currency system could challenge the effectiveness of traditional financial policy tools, as people may prefer to hold digital currencies instead of fiat currencies. This shift could lead to less demand for central bank money, complicating efforts to maintain economic stability. So, economists and policymakers are increasingly discussing how to adjust existing frameworks to accommodate the rise of digital currencies, with some suggesting a hybrid model that includes both traditional and digital currencies.

Directions: An introductory sentence for a brief summary of the passage is provided below. Complete the summary by selecting the THREE answer choices that express the most important ideas in the passage. Some sentences do not belong in the summary because they express ideas that are not presented in the passage or are minor ideas in the passage. This question is worth 2 points.  

1. Digital currencies are transforming the financial landscape, presenting both opportunities and challenges.   
   
   
   1. Digital currencies operate independently of central banks, allowing for direct transactions.
   2. The rise of digital currencies has led to increased financial instability and environmental concerns.
   3. Central banks are exploring CBDCs to maintain stability and trust in the financial system. 
   4. Digital currencies are expected to completely replace traditional currencies in the near future. 

Paragraph 6

(A) In conclusion, the evolution of digital currencies presents both opportunities and challenges for the global financial system. (B) While they offer the potential for greater efficiency and accessibility in financial transactions, concerns about regulation, instability, and environmental impact need to be addressed. (C) The exploration of CBDCs by central banks shows a recognition of the need to adapt to this fast-changing landscape. As digital currencies continue to evolve, their implications for financial policy, financial inclusion, and the future of money will remain topics of ongoing discussion and debate. (D) Ultimately, the effect of digital currencies on the global economy will depend on how well parties manage these complexities, take advantage of potential benefits, and reduce associated risks. Questions still exist about the long-term sustainability of digital currencies and their role in shaping the future of financial systems around the world.

1. In paragraph 6, there is a missing sentence. The paragraph shows four letters  (A),  (B),  (C),  (D) that indicate where the following sentence could be added. 
   

   "Addressing these concerns will be crucial for the widespread adoption of digital currencies." 

   Where would the sentence best fit? 

   1. Option A
   2. Option B
   3. Option C
   4. Option D

Hold on!  Before checking your answers and matching them, explore the TOEFL Exam Pattern and Syllabus!

Answer Key with Explanation for TOEFL Reading Passage - Digital Currencies

1.  Answer: A

Explanation: The passage explicitly states that the technology behind digital currencies is called blockchain, which acts as a distributed ledger recording all transactions. This indicates that blockchain is fundamental to the functioning of digital currencies.

2. Answer: B

Explanation: The passage highlights that digital currencies operate independently of any central authority, which includes central banks. Therefore, the statement that they are regulated by central banks is incorrect and does not align with the characteristics described in the paragraph.

3. Answer: B

Explanation: The passage discusses how digital currencies enable faster and cheaper cross-border transactions, particularly benefiting individuals in developing countries who may lack access to traditional banking services. This suggests that digital currencies can enhance financial efficiency in these regions.

4. Answer: B

Explanation: The mention of lower transaction fees serves to illustrate a significant benefit of digital currencies, particularly in comparison to conventional money transfer services. This example emphasizes how digital currencies can improve financial access and efficiency for users.

5. Answer: B

Explanation: In this context, "facilitate" means to make something easier or to promote its occurrence. The passage indicates that the anonymity and lack of regulation of digital currencies can promote illegal activities, aligning with the meaning of "facilitate."

6. Answer: A

Explanation: This option accurately captures the essence of the critics' argument regarding the potential for illegal activities stemming from the anonymity of digital currencies, which is the main point made in the original sentence.

7. Answer: A

Explanation: The correct answer is option A. The paragraph focuses on Central Bank Digital Currencies (CBDCs) and outlines their potential benefits, such as improving financial inclusion and maintaining stability. This indicates that the primary purpose is to discuss the advantages of CBDCs.

8. Answer: A, B, C

Explanation: Options A, B,and C encapsulate the key ideas presented in the passage regarding the independence of digital currencies, the challenges they pose, and the response of central banks through CBDCs.

9. Answer: B

Explanation: - This sentence logically fits here as it directly relates to the concerns mentioned in the preceding clause about the potential benefits of digital currencies, emphasizing the importance of addressing these concerns for widespread adoption.

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