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$SystemCharacterEncoding gives the default raw character encoding for the computer system on which Mathematica is being run.
$SystemCharacterEncoding is used to determine the default value of $CharacterEncoding.
The notebook front end handles raw character encodings independent of the kernel.
The possible settings for $SystemCharacterEncoding are the same as for $CharacterEncoding.
See the Mathematica book: Section 2.7.8.
See also: CharacterEncoding.