Cryptocurrency : Important Topics for UPSC Exams

Cryptocurrency : Important Topics for UPSC Exams

In news for :

  • Cryptocurrencies are in news for many reasons. The price of bitcoins has been rising continuously for some time now. The price of cryptocurrency has surged rapidly, trespassing several thresholds one after the other. In recent years cryptocurrency is fastly becoming the part of global economic system.

What is cryptocurrency?

  • Cryptocurrency is an encrypted decentralized digital currency transferred between peers and confirmed in a public ledger via a process known as mining.

Some important cryptocurrencies

  • Bitcoins
  • Litecoin
  • Namecoin
  • Swiftcoin
  • Bytecoin
  • Gridcoin

India's stand on cryptocurrencies :

  • In India the creation, trading or usage of cryptocurrencies including Bitcoins, as a medium for payment are not authorised by any central bank or monetary authority.
  • On December 5, 2017, the RBI reiterated its warnings in wake of significant spurt in valuation of bitcoins. RBI stated that “Attention of members of public is drawn cautioning users, holders and traders of Virtual Currencies including Bitcoins regarding the potential economic, financial, operational, legal, customer protection and security related risks associated in dealing with such currencies”.

Risks associated with the use of cryptocurrencies

  • Digital currencies, being in electronic format, are prone to losses arising out of hacking, loss of password etc.
  • lack of any authorized central agency to regulate the payments or to turn to for redressal of grievances.
  • There is no underlying of asset for Cryptocurrencies, making the value a matter of speculation.
  • The exchanges are located in various parts of the world, making the law enforcement a tricky thing for the multiple jurisdictions available.
  • Trading may subject the user to illicit and illegal activities since the cryptocurrencies, can easily be used for illegal activities anonymously.

Important terms related to cryptocurrency:

Blockchain technology

  • The blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value.

Public Ledgers

  • All confirmed transactions from the start of a cryptocurrency’s creation are stored in a public ledger. The identities of the coin owners are encrypted, and the system uses other cryptographic techniques to ensure the legitimacy of record keeping. The ledger ensures that corresponding digital wallets can calculate an accurate spendable balance.

Transactions

  • A transfer of funds between two digital wallets is called a transaction. That transaction gets submitted to a public ledger and awaits confirmation.

Mining

  • In simple terms, mining is the process of confirming transactions and adding them to a public ledger. In order to add a transaction to the ledger, the “miner” must solve an increasingly-complex computational problem (like a mathematical puzzle).

MCQ’s

1. Consider the following statements regarding cryptocurrencies.

  • Crypto Currency is an encrypted centralized digital currency.
  • These currencies are regulated by central monetary authority.

Which of the statement(s) given above is/are correct ?

  • 1 only
  • 2 only
  • 1 and 2 both
  • Neither 1 nor 2

2. Which of the following is not a type of cryptocurrency ?

A. Litecoin
B. Bitcoin
C. renminbi
D. Gridcoin

Answers

  1. D
  2. C

UPSC Mains question

Q. What are cryptocurrencies? What are the risk associated with them? What is india’s position on cryptocurrencies? comment.

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