Question 31 from UPSC CSE 2016 - Economy

Question

With reference to 'Bitcoins', sometimes seen in the news, which of the following statements is/are correct?
1. Bitcoins are tracked by the Central Banks of the countries.
2. Anyone with a Bitcoin address can send and receive Bitcoins from anyone else with a Bitcoin address.
3. Online payments can be sent without either side knowing the identity of the other.
Select the correct answer using the code given below.

IASCODEX · Accepted Answer

Correct Option: B. 2 and 3 only

Strategy: Evaluate statements about Bitcoin based on its decentralized nature. Statement 1 is incorrect because central banks do not track Bitcoin transactions. Statements 2 and 3 are correct, reflecting Bitcoin's peer-to-peer functionality and pseudonymous transactions.

Key Info: **Bitcoin (BTC)**
- Bitcoin is a decentralized digital currency, without a central bank or single administrator, that can be sent from user to user on the peer-to-peer bitcoin network without the need for intermediaries.
- Transactions are verified by network nodes through cryptography and recorded in a public distributed ledger called a blockchain.
- It was invented in 2008 by an unknown entity or person using the pseudonym Satoshi Nakamoto and released as open-source software in 2009.

**Decentralization and Central Banks**
- A defining feature of Bitcoin is its decentralization. It operates without the oversight of a central authority like a central bank or government.
- Central Banks typically regulate and track transactions within traditional financial systems. They do not directly 'track' Bitcoin transactions in the same manner, though they may monitor the broader cryptocurrency market for regulatory purposes, financial stability, or illicit activities.
- This independence from central control is a key differentiator from fiat currencies.

**Bitcoin Addresses and Peer-to-Peer Transactions**
- Every Bitcoin user has one or more Bitcoin addresses, which are alphanumeric strings derived from public keys.
- Transactions involve sending Bitcoins from one Bitcoin address to another. The network verifies these transactions, allowing direct peer-to-peer transfers between users without the need for an intermediary financial institution.
- This functionality means anyone with a Bitcoin address can send and receive Bitcoins from anyone else with a Bitcoin address.

**Pseudonymity of Transactions**
- Bitcoin transactions are pseudonymous, not truly anonymous. While transactions are publicly visible on the blockchain, they are linked to Bitcoin addresses, not directly to real-world identities.
- This means that while the transaction history is transparent, the identities of the individuals behind the addresses are not inherently revealed by the network itself.
- Users can send and receive payments without either side necessarily knowing the real-world identity of the other party, relying only on their Bitcoin addresses.

IASCODEX · Answer

Option A: 1 and 2 only

IASCODEX · Answer

Option C: 3 only

IASCODEX · Answer

Option D: 1, 2, and 3