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UPSC Mains Previous Year Questions: Cryptocurrency | Indian Society for UPSC CSE PDF Download

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What is Cryptocurrency? How does it affect global society? Has it been affecting Indian society also? (UPSC GS1 2021)

A cryptocurrency or crypto is a virtual currency secured by cryptography. It is designed to work as a medium of exchange, where individual ownership records are stored in a computerised database. The cryptocurrency works on blockchain technology and is free from control of government agencies. Cryptocurrency is a new emerging technology which is revolutionizing the way people make monetary transactions.
Crypto has affected global society in both positive and negative way as discussed below:

  • Increasing usage of Cryptocurrency is economically integrating the global society. Currently, the world is divided in terms of different currencies. Crypto bypasses this division and is increasingly becoming a sought-after way of transacting.  
  • Cryptocurrencies take away the sovereign power of issuing currency. Thus, making economic policy ineffective and diluting the bond between citizen and government.   
  • The transactions in crypto are cheap and faster. Thus, it makes capital more mobile/volatile posing risk to macroeconomic stability and consequent social consequences.  
  • Cryptocurrency has emerged as a new asset class (alternative of gold). However, fluctuation in the value of cryptocurrency has made both kings and beggars.   
  • Crypto is used by terrorist organization, drug cartels to smuggle contrabands which negatively impacts society at large. Anonymity in cryptocurrency has potential to increase crime in society.  
  • With increasing acceptance of crypto, people who are digitally illiterate are being left behind. Thus, it can lead to a disproportionate rise in inequality.  

Effect of Crypto on Indian Society

Crypto is still in a nascent phase in India, with a huge uncertainty about its future. As RBI initially banned crypto trading in 2018, which was reversed by the Supreme court later. The following are the effect of crypto on Indian society

  • With the rise of cryptocurrency, a new crypto community has emerged – that includes amateur investors, professionals and jobs have come up in the society. Example: Multiple crypto-exchanges have come up.   
  • India is the largest receiver of remittances. However, the people lose money on conversion, processing charges, and switching to crypto will help people to get rid of these expenses.  
  • As an asset, cryptocurrency has offered huge returns in the past, so it has become a fad among Indian youth to invest in these volatile assets, overlooking the risk associated with it.   
  • India became victim to ransomware attacks like Wannacry etc. and the ransom was collected in crypto-> may promote culture of digital extortion.

To make use of the revolutionary potential of underlying technology behind the cryptocurrency, while avoiding its negative consequences, a proper regulatory framework is required.

Topics Covered - Cryptocurrency

The document UPSC Mains Previous Year Questions: Cryptocurrency | Indian Society for UPSC CSE is a part of the UPSC Course Indian Society for UPSC CSE.
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FAQs on UPSC Mains Previous Year Questions: Cryptocurrency - Indian Society for UPSC CSE

1. What is cryptocurrency and how does it differ from traditional currencies?
Ans. Cryptocurrency is a digital or virtual form of currency that uses cryptography for secure financial transactions, control the creation of new units, and verify the transfer of assets. It differs from traditional currencies in various ways, such as being decentralized, operating on a technology called blockchain, and not being issued or regulated by any central authority like a government or financial institution.
2. How does blockchain technology ensure the security and transparency of cryptocurrency transactions?
Ans. Blockchain technology, which underlies cryptocurrencies, ensures security and transparency by creating a decentralized and distributed ledger that records all transactions. Each transaction is verified by multiple computers (nodes) within the network, making it difficult for any single entity to manipulate or alter the transaction history. Additionally, the use of cryptographic algorithms ensures the integrity and authenticity of the transactions, making it highly secure.
3. What are the advantages and disadvantages of using cryptocurrency?
Ans. Some advantages of using cryptocurrency include faster and cheaper cross-border transactions, increased financial privacy, and the potential for high returns on investment. However, there are also disadvantages such as price volatility, lack of regulation and consumer protection, potential for illegal activities, and the risk of losing access to funds due to technological issues or human error.
4. How are new cryptocurrencies created and what is the process of mining?
Ans. New cryptocurrencies are created through a process called mining, which involves solving complex mathematical problems using powerful computers. This process confirms and adds new transactions to the blockchain, and as a reward for their computational efforts, miners receive newly created cryptocurrency units. The mining process also helps secure the network and maintain the integrity of the blockchain.
5. What is the future outlook for cryptocurrency and its impact on the global economy?
Ans. The future outlook for cryptocurrency is uncertain but promising. While some experts believe that cryptocurrencies could revolutionize the financial system and become mainstream, others express concerns about its volatility and lack of regulation. The impact on the global economy is still evolving, with some countries embracing cryptocurrencies as a means of economic growth and financial inclusion, while others remain skeptical and cautious. Further research and developments in technology, regulations, and adoption will shape the future of cryptocurrency and its impact on the global economy.
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