UPSC Mains 2021 GS Paper 1 Q19: model answer

In September 2021 El Salvador made Bitcoin legal tender; a year later the collapse of the FTX exchange wiped out billions of dollars of investors' money. Both events capture the promise and the risk of cryptocurrency.

What it is

A cryptocurrency is a digital asset secured by cryptography and recorded on a decentralised ledger (blockchain), without a central bank or government issuer. Bitcoin (2009) was the first; thousands now exist.

Effects on global society

• Financial access: low-cost cross-border remittances and payments for the unbanked.
• Trust shifted from institutions to code, a challenge to state monopoly over money.
• Speculation and inequality: wild price swings, scams and crashes (Terra-Luna, FTX 2022) hurt small investors.
• Crime: ransomware, money laundering, terror financing and darknet trade.
• Environment: Bitcoin mining uses electricity comparable to a mid-sized country.
• Geopolitics: sanctions evasion; central banks respond with digital currencies.

Effects on Indian society

• India has one of the world's largest numbers of crypto users, many of them young investors from small towns hoping for quick wealth.
• Cases of fraud and Ponzi schemes (GainBitcoin) and losses for families.
• Policy swings: RBI's 2018 banking ban struck down by the Supreme Court (IAMAI case, 2020); a 30% tax on gains and 1% TDS from 2022.
• The RBI's e-rupee pilot (2022) offers a state-backed digital alternative.
• Skills and start-ups in blockchain for land records and supply chains.

Way forward

• Clear regulation with investor protection, KYC and anti-money-laundering rules.
• Global coordination through the G20, which India pushed during its 2023 presidency.
• Financial literacy for young investors.

Cryptocurrency is changing how society thinks of money and trust. India's challenge is to keep the innovation while protecting citizens from its risks.