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Q 14- In the recent year, Bitcoin's validity and mainstreaming have improved. Explain how Bitcoins and other cryptocurrencies work in this context. Why do governments and central banks view them with suspicion? Explain. (250 words)

  Paper & Topic: GS III à Science and Technology- developments and their

  applications and effects in everyday life; Achievements of Indians in science &  

  technology; indigenization of technology and developing new technology.


  • Model Answer:


  • Introduction:


  • Individual coin ownership records are recorded in a ledger that exists in the form of a computerised database, making cryptocurrencies a digital asset designed to act as a medium of trade.
  • To secure transaction records, control the creation of extra coins, and verify the transfer of coin ownership, it employs powerful cryptography.
  • It is not normally issued by a central authority and does not exist in physical form (like paper money).
  • In contrast to centralised digital money and central banking institutions, cryptocurrencies often use decentralised control.


  • Body:


  • The Importance of Cryptocurrencies:
  • Check for Corruption:
  • Because blocks are distributed over a peer-to-peer network, they aid in the prevention of corruption by tracing the movement of funds and transactions.
  • Time Effective:
  • Cryptocurrencies can help remitters and receivers save money and time because they are performed wholly via the Internet, run on a mechanism with very low transaction fees, and are nearly instantaneous.
  • Cost-effective:
  • Intermediaries such as banks, credit card companies, and payment gateways charge fees that amount to over 3% of the total world economic output of more than $100 trillion. 4
  • Incorporating blockchain into these industries might save hundreds of billions of dollars.


  • Issues with Cryptocurrencies:
  • Consumer protection:
  • Cryptocurrencies pose a threat to consumers.
  • They are not legal tender since they lack a governmental guarantee.
  • Market volatility:
  • Because of their speculative character, they are extremely volatile. Bitcoin, for example, has dropped in value from USD 20,000 in December 2017 to USD 3,800 in November 2018. 3
  • Security risk:
  • If a user's private key is lost, they lose access to their cryptocurrency (unlike traditional digital banking accounts, this password cannot be reset).


  • Malware threats:
  • In some circumstances, technical service providers (cryptocurrency exchanges or wallets) store these private keys, which are vulnerable to malware or hacking.


  • Money laundering:
  • Cryptocurrencies are more susceptible to money laundering and criminal activity.
  • Because the public keys involved in a transaction cannot be directly connected to an individual, they enable better anonymity than traditional payment systems.


  • Regulatory bypass:
  • The supply of cryptocurrencies in the economy cannot be regulated by a central bank.
  • If they become widely used, this might put the country's financial stability at danger.


  • Power consumption:
  • Because authenticating transactions consumes a lot of energy, it could jeopardise the country's energy security (the total electricity use of bitcoin mining, in 2018, was equivalent to that of mid-sized economies such as Switzerland).


  • India's Stand on Cryptocurrencies:


  • The Reserve Bank of India (RBI) issued a circular in 2018 prohibiting all banks from dealing in cryptocurrencies.
  • In May 2020, the Supreme Court ruled that the circular was illegal.
  • The government recently declared that it will introduce the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, to establish a sovereign digital currency while simultaneously prohibiting the use of private cryptocurrencies.
  • In India, monies invested in blockchain start-ups represent for less than 0.2 percent of the total amount raised by the industry internationally.
  • Because of the present stance on cryptocurrencies, it is nearly hard for blockchain entrepreneurs and investors to make a profit.


  • Issues with the Prohibition of Decentralized Cryptocurrencies:


  • Blanket Ban:
  • The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, is based on a blanket ban. It aims to make all private cryptocurrencies illegal in India.
  • However, categorising cryptocurrencies as public (supported by the government) or private (owned by an individual) is incorrect because they are decentralised but not private.
  • Decentralized cryptocurrencies such as bitcoin aren't, or rather, can't, be controlled by any private or public institution.


  • Brain-Drain:
  • A ban on cryptocurrencies is likely to result in a talent and business exodus from India, similar to what happened after the RBI banned cryptocurrencies in 2018.


  • At the time, blockchain professionals relocated to nations that controlled cryptocurrency, such as Switzerland, Singapore, Estonia, and the United States. Blockchain innovation, which has applications in governance, data economy, and energy, will grind to a halt in India as a result of the blanket ban.


  • Prohibition on Transformative Technology:
  • A ban would deprive India, its entrepreneurs, and residents of a transformative technology that is rapidly gaining traction around the world, including by some of the world's greatest corporations like Tesla and MasterCard.


  • A Wasted Effort:
  • Banning rather than regulating will just create a parallel market, increasing illegal use and contradicting the ban's objective.
  • A ban is impractical because anyone may buy cryptocurrencies on the internet.


  • Inconsistent Policies:
  • Banning cryptocurrencies contradicts the Ministry of Electronics and Information Technology's (MeitY) Draft National Strategy on Blockchain, 2021, which hails blockchain technology as a transparent, secure, and efficient technology that adds a layer of trust to the internet.


  • Next Steps:
  • The Solution Is Regulation:
  • Regulation is required to avoid significant issues, guarantee that cryptocurrencies are not mishandled, and safeguard naive investors from market instability and potential scams.
  • The regulation must be clear, transparent, cogent, and guided by a vision of what it aspires to accomplish.


  • Clarity on crypto-currency definition:
  • A legal and regulatory framework must first classify crypto-currencies as securities or other financial instruments under applicable national laws, as well as name the responsible regulatory authority.


  • Strict KYC Norms:
  • Rather than outright banning cryptocurrencies, the government should control their trading by imposing strict KYC, reporting, and taxation requirements.


  • Ensuring Transparency:
  • To address concerns about transparency, information availability, and consumer protection, record keeping, inspections, independent audits, investor grievance redress, and dispute settlement may be considered.


  • Reigniting the Entrepreneurial Wave:
  • Cryptocurrencies and Blockchain technology have the potential to rekindle the entrepreneurial wave in India's startup ecosystem, resulting in job opportunities for everyone from blockchain developers to designers, project managers, business analysts, promoters, and marketers.


  • Conclusion:
  • India is on the verge of the next phase of the digital revolution, and it has the capacity to leverage its human capital, skills, and resources to become one of the wave's winners.
  • All that is required is for policymaking to be done correctly.
  • The Fourth Industrial Revolution will include blockchain and crypto assets, and Indians should not be forced to ignore them.
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