CRYPTOCURRENCY (Syllabus: GS Paper 3 – Economy)

Context: The Reserve Bank of India (RBI) recently cautioned that cryptocurrencies, propelled by speculative interests, pose risks to the financial system, urging retail investors to exercise caution.

Cryptocurrency

• About: Cryptocurrency refers to a digital or virtual currency that employs cryptography for security measures.
• Decentralization: One of the defining features of cryptocurrencies is their decentralized nature, which means they are not under the control of any government or institution.
• Examples: Prominent examples of cryptocurrencies include Bitcoin, Ethereum, and Litecoin.
• How Does Cryptocurrency Work: It operates through a decentralized digital ledger called the blockchain, where transactions are publicly recorded and verified by a network of computers worldwide.
• Three key-elements of crypto-currency:

oIt is a digital representation of value,

oIt can be transferred electronically and

oIt is recorded in a digital ledger (Blockchain Technology) that is widely accessible.

• Types of Cryptocurrencies: Payment cryptocurrency, Utility Tokens, Stablecoins and Central Bank Digital Currencies (CBDC).

Significance of Cryptocurrencies

• Corruption Monitoring: Operating on a peer-to-peer network, blockchain technology aids in monitoring corruption by tracing fund flows and transactions.
• Efficiency in Time: Cryptocurrencies can significantly reduce costs and time for both senders and recipients, as transactions occur online with minimal fees and near-instantaneous processing.