ESSAY PAPER – UPSC Civil Services Mains – 2021
Model Paper 6 (dt.5.1.2022)
Collected by : Praturi Potayya Sarma
CRYPTOCURRENCY
On hearing the word “Crypto”, the thing which comes into the mind of most of us is Cryptography, that
is the technique of secure communication in the presence of an intruder (interestingly, we will be
requiring this concept here as well!). Due to its long and very interesting history spanning several
centuries, it has more or less become familiar to a large part of the society
But, the concept of Cryptocurrency is still unknown to many. It is an emerging form of digital currency,
which has gained immense popularity over the entire world in the last few years. According to some
estimates, the total value of all cryptocurrencies (when converted to conventional money) is more than
2.5 trillion USD. Loosely speaking, it is a nexus of Digital Technology, Economics, Computer Science, and
Mathematics. Before going into details, we need to revise few basic concepts. The first is that of
currency. Currency, as we know, is one of the most essential components of survival in today’s world. It
is the very medium of exchange of goods and services used in the society. Different countries have
different system of currencies. We use physical wallets to store money (notes or coins) or have bank
account. In our country, it is the Reserve Bank of India (RBI) which controls the issuing of notes. Apart
from looking after the monetary transaction, its other responsibilities include maintaining the stability of
the economy. A fundamental limitation of currency is that it has a certain dependence on location. For
example, we cannot freely use the Indian rupee when we are travelling abroad and vice versa. A certain
note may become invalid, although its monetary value is never lost, precisely what happened during the
demonetization of November 2016. Thus, currency can be subjected to manipulation. A natural question
which arises is can a system of currency ever exist, which is completely digital in nature, free from the
domination of a central institution, and which gives more power to the users who are using it? In this
article, we would mainly focus on how this system works, some important aspects of this system, the
advantages due to which the craze for cryptocurrency investments has increased so much, and some
demerits of this system.
Early Years:
Cryptocurrency is a new kind of private digital currency or digital money, which can be used to pay
someone using the Internet. It is radically different from the traditional currency to which we are
accustomed. Broadly, they can be viewed as“digital alternatives” to the money issued by the
government. It is totally decentralized in nature, that is, a single body cannot exercise total control over
it. As the word “digital” will come up often, it is essential to clear one common misunderstanding in the
beginning. Cryptocurrency tokens are not the same as the transactions which we do using Credit Cards,
Net Banking, e-Wallets, or Debit Cards. There, the medium may be Internet in most cases but it involves
government-issued money.
Now, for some currency to work, some tokens are needed for real-world transactions, like the notes or
coins. One such token is bitcoin, arguably one of the most popular digital currencies. This means, in a
transaction carried out using Cryptocurrency, a person may send bitcoins as payment to another person,
using the Internet. All these digital currencies are actually computer programs, which are written for this
purpose. The origin of bitcoin is however unclear. A person, or a group of people (till date, we do not
know accurately), under the pseudonym Satoshi Nakamoto, had launched it in January 2009. The
program was written in C++. Bitcoin is not under the regulation of the Government, and it is limited (just
like Gold). The following are a few important Cryptocurrencies other than Bitcoin, which
are also
regularly used:
• Ethereum
• Polkadot
• Cardano
• Litecoin
• Dogecoin (seen by some as memecoin)
The Game of Demand :
Let us consider the following situation. We have a piece of land, and there are several people bidding to
own it. As a natural consequence, price of the property soars high. For a similar reason, there is always a
rush of people who are racing to buy Cryptocurrencies, when their prices are comparatively low. Value
of a thing seldom remains constant, and as far as money is concerned, its value decreases with time
(mostly). This means, if we can buy something for Rs.500 this year, it may cost us more than that after 4-
5 years. Currently, the Dogecoin is the cheapest cryptocurrency to buy, and many people view it as a
valuable investment option. As cryptocurrencies are limited, their value depends on their demand. For
example, though it started from just Rs.10, the current value of Bitcoin is close to ₹40 lakh. Investors
always keep a track of this rise and fall in the price of currencies and plan their investments accordingly.
The price depends on various factors, like the news, current market conditions, etc. Now, let’s see how
the safety of all these transactions is ensured.
The Blockchain Technology (Chain of Blocks) :
The Blockchain system plays a pivotal role and is the technology on which Cryptocurrency is based. For
ordinary transaction, arecord is maintained by the bank. In this case, the same job is performed by
blockchain. To define, Blockchain is the decentralized system shared among computer networks which
acts as a “digital database”, storing information about the transaction made by the users. The structure
of this database is as follows: A blockchain is designed to collect information together in groups, known
as “blocks”. Blocks have certain storage capacities and, when it is reached, they are closed and linked to
the previously filled block. Thus, they form a chain and are known as the “blockchain.” All new
information thatfollows that freshly added block is compiled into a newly formed block that will also be
added to the chain once filled. Whenever a transaction occurs, it is authenticated through a series of
steps, before getting validated. As far as the question of security is concerned, blockchain is transparent,
i.e., it is freely available on every computer which is participating in the verification process, and any
mischief done can be detected. The concept of blockchain is also used in other sectors like Tourism,
Education and Insurance. In the domain of cryptocurrency, it is the technology which underpins the
bitcoin. There exists something called the Public Ledger, which is a record keeping system. It maintains
the participants’ identity and data anonymously, using Cryptography. This ledger is not maintained by a
single person, but is spread across the systems of huge number of people working on it. This is referred
to as the “peer-to-peer network”. Special kind of software and computer systems are needed to achieve
these sophisticated tasks, and the time limit associated is usually ranges from 10 minutes to nearly an
hour. People maintaining all these tasks are called “Miners” and the process is called “Mining”.
Disadvantages of the System :
Every system has got its own set of pros and cons, and this one is no exception. Though it may sound to
be extremely lucrative, one of the key disadvantages is that the users do not have any specific authority
to report their complaints, as the network is huge and no such omnipotent institution exists. Also, this
may be used for various unethical tasks, especially by people who fake their identity. Let us assume that
a person ‘A’ buys some item worth ₹25 thousand from ‘B’ and wants to pay in Cryptocurrency, but ‘B’
turns out to be a fraud. If ‘A’ would have used normal currency, then some bank would have stored the
record. But, in this system, as everything is virtual, and ‘B’ provided some incorrect ID to ‘A’ for receiving
the payment, the task of tracking down ‘B’ gets very difficult. With digital currency, however, there is a
risk that a holder of the Cryptocurrency can make a copy of the digital token and send it to another
party or merchant while retaining the original
India’s policy towards Cryptocurrency :
The Ministry of Finance, Government of India has stated that Bitcoins will not be accepted as a valid
currency in India. This means, we cannot use them to buy a gadget or pay for a service. The RBI
anticipates that Cryptocurrency possess a threat to the financial stability of the country. However, many
sections among the Government have insisted on introducing some measures on regulation of
cryptocurrencies, and not entirely banning them. More recently, there have been speculations that the
Government is going to bring a new bill regarding this system. For a country like India, where a large
portion of the society is not that tech savvy yet, use of Cryptocurrency may not be catching up fast. The
Indian Government is not looking to ban them but regulate them as assets. All Indian crypto exchanges
will reportedly come under the purview of the Securities and Exchange Board of India (SEBI). Indian
citizens will no longer be allowed to hold their crypto assets on foreign exchanges or in private wallets, it
is said by some sources. India is, however, working on its own central bank digital currency (CBDC) that
will be governed and monitored by the RBI. Cryptocurrency has opened up a vast new area for the
future generations. It is still an emerging market, and a lot of progress is yet to take place. The hugely
interdisciplinary idea behind it is definitely innovative, but for it to function more efficiently, a greater
number of people need to be aware of the various aspects associated with this system. A few years
back, many people had problems with digital payments gateways. But now, they have become quite
habituated with it, and in fact there are several places, like the Toll Plazas on highways, where e-
payment is being used extensively. Digital literacy is after all essential to live in today’s time. The system
of Cryptocurrency as an alternative to physical currency may bring about a revolution in the way society
works and will be a familiar name in the coming few years.