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Q66 (IAS/2016) Economy › Money, Banking & Inflation › Digital currency payments Official Key

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.

Result
Your answer: —  ·  Correct: B
Explanation

The correct answer is option B (statements 2 and 3 only).

**Statement 1 is incorrect**: The major point of difference between fiat currency and virtual currency is that while the former is expressly guaranteed by the Central Government, the latter has no such backing.[1] Crypto currencies are not issued by Government or RBI but rather encryption techniques are used to both create and control the number of units and verify its exchange.[2] Since cryptocurrencies like Bitcoin operate independently of central banks and governments, they are not tracked by Central Banks.

**Statement 2 is correct**: Every user has a public address used to buy, sell, or transfer bitcoin[3], which means anyone with a Bitcoin address can transact with anyone else who has a Bitcoin address in the decentralized network.

**Statement 3 is correct**: It is possible to send and receive bitcoins without revealing any personally identifiable information.[3] The anonymity in use of cryptocurrencies may actually facilitate several illegal activities like terror funding, smuggling, drugs trade, money laundering and other criminal activities.[4] This confirms that Bitcoin transactions can occur without either party knowing the real-world identity of the other.

Sources
  1. [1] https://prsindia.org/files/bills_acts/bills_parliament/1970/Report%20of%20the%20Inter-Ministerial%20Committee%20on%20Virtual%20Currencies.pdf
  2. [2] Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > What are Crypto currencies? > p. 77
  3. [3] https://www.ice.gov/sites/default/files/documents/Report/2017/CSReport-13-2.pdf
  4. [4] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > CRYPTOCURRENCIES > p. 160
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PROVENANCE & STUDY PATTERN
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Don’t just practise – reverse-engineer the question. This panel shows where this PYQ came from (books / web), how the examiner broke it into hidden statements, and which nearby micro-concepts you were supposed to learn from it. Treat it like an autopsy of the question: what might have triggered it, which exact lines in the book matter, and what linked ideas you should carry forward to future questions.
Q. With reference to 'Bitcoins', sometimes seen in the news, which of the following statements is/are correct? 1. Bitcoins are tracked by th…
At a glance
Origin: Books + Current Affairs Fairness: Low / Borderline fairness Books / CA: 3.3/10 · 3.3/10

This question tests the 'Raison d'être' (reason for existence) of the technology rather than trivia. If you knew the single core definition of Bitcoin—'Decentralized'—Statement 1 becomes an immediate falsehood, making the answer obvious. It is a conceptual check, not a current affairs memory test.

How this question is built

This question can be broken into the following sub-statements. Tap a statement sentence to jump into its detailed analysis.

Statement 1
Are Bitcoins tracked by the central banks of countries?
Origin: Weak / unclear Fairness: Borderline / guessy
Indirect textbook clues
Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > CRYPTOCURRENCIES > p. 160
Strength: 5/5
“A cryptocurrency is a digital money transferred over the internet. Cryptocurrencies are based on the decentralized ledger-based blockchain technology which seeks to make the currency system decentralized, unlike the present government-issued centralized form. Some popular cryptocurrencies are Bitcoin, Ethereum, etc. However, the cryptocurrencies have the following disadvantages: • These are not backed by any physical assets, unlike the gold reserve in case of fiat currencies. • It is still prone to hacking, and there have been instances of theft of Bitcoins from digital wallet, making them risky. • The anonymity in use of cryptocurrencies may actually facilitate several illegal activities like terror funding, smuggling, drugs trade, money laundering and other criminal activities.”
Why relevant

Defines cryptocurrencies as based on a decentralized blockchain, unlike government-issued centralized money.

How to extend

A student could combine this with knowledge that decentralization means no single authority (like a central bank) controls the ledger, so central banks would lack built‑in control to 'track' all transactions.

Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > Why RBI launched e-Rupee? > p. 78
Strength: 4/5
“• Many Central Banks are worried that the widespread adoption of these independent crypto currencies could weaken their control over the financial system. This could cause financial instability especially because crypto currencies do not have the legal or the regulatory safeguard that the Central Bank money does, so why not issue a digital currency of their own.• Central banks seek to meet the public's need for digital currencies, manifested in the increasing use of private virtual currencies, and thereby avoid the more damaging consequences of such private currencies.• Central banks, faced with dwindling usage of paper currency, seek to popularize a more acceptable electronic form of currency like e-rupee.”
Why relevant

States many central banks are worried that independent cryptocurrencies could weaken their control over the financial system.

How to extend

One can infer that if central banks lack control they may also lack comprehensive ability to track such currencies without extra measures (e.g., regulation or monitoring tools).

Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 10.Oversight of payment and settlement systems > p. 70
Strength: 4/5
“The central bank of any country is usually the driving force in the development of national payment systems. The Reserve Bank of India (RBI) as the central bank of India has been playing this developmental role and has taken several initiatives for Safe, Secure, Sound, Efficient, Accessible and Authorised payment systems in the country. In India, the payment and settlement systems are regulated by the Payment and Settlement Systems Act, 2007 (PSS Act). In terms of Section 4 of the PSS Act, no person other than RBI can commence or operate a payment system in India unless authorised by RBI.”
Why relevant

Says central banks drive development and regulate national payment and settlement systems, and operation requires central bank authorization.

How to extend

A student could note that authorized payment systems are monitored, so private, unauthorized crypto payment networks may fall outside normal central bank oversight and tracking regimes.

Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > Central bank > p. 38
Strength: 3/5
“Central Bank is a very important institution in a modern economy. Almost every country has one central bank. India got its central bank in 1935. Its name is the 'Reserve Bank of India'. Central bank has several important functions. It issues the currency of the country. It controls money supply of the country through various methods, like bank rate, open market operations and variations in reserve ratios. It acts as a banker to the government. It is the custodian of the foreign exchange reserves of the economy. It also acts as a bank to the banking system, which is discussed in detail later.”
Why relevant

Lists central bank functions like issuing currency and controlling money supply — i.e., central banks handle official, legal tender.

How to extend

Using that distinction, a student could reason that assets not issued as legal tender (like Bitcoin) are not part of the central bank's core issuance/monitoring role and so may not be 'tracked' in the same manner.

Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > SHADOW BANKING > p. 188
Strength: 3/5
“It comprises a set of markets and institutions that operate partially (or fully) outside the traditional commercial banking and are either lightly regulated or unregulated. Simply, it is not illegal; it is just not strictly monitored as Commercial Banks are monitored by the RBI. Examples include Housing Finance Companies (HFCs), Retail-NBFCs and Liquid Debt Mutual Funds (LDMFs). Shadow Banks do not have direct access to central bank liquidity. The shadow banking system is highly leveraged with risky and illiquid assets, whereas its liabilities are disposed to 'bank run'. Please Note: Bank Run occurs when many clients withdraw their money from a bank because they believe the bank may become insolvent or cease to function in near future. wo even there”
Why relevant

Explains some financial actors operate outside strict central bank monitoring (shadow banking) and thus are not directly within central bank liquidity channels.

How to extend

By analogy, a student could treat decentralized crypto networks as similarly outside direct central bank systems, suggesting limited direct tracking by central banks.

Statement 2
Can anyone with a Bitcoin address send and receive Bitcoins to or from anyone else with a Bitcoin address?
Origin: Web / Current Affairs Fairness: CA heavy Web-answerable

Web source
Presence: 5/5
"it is possible to send and receive bitcoins without revealing any personally identifiable information. Every user has a public address used to buy, sell, or transfer bitcoin"
Why this source?
  • Explicitly states bitcoins can be sent and received without revealing personally identifiable information, implying address-based transfers are possible between parties.
  • Notes every user has a public address used to buy, sell, or transfer bitcoin, linking the address to transaction capability.
Web source
Presence: 4/5
"UTXOs are associated with a bitcoin [address] and can be spent by creating a valid signature corresponding to the scriptPubKey of the address."
Why this source?
  • Explains that UTXOs are associated with a bitcoin address and can be spent by creating a valid signature, indicating sending requires control of the address's signing key.
  • States addresses are cryptographic and on their own do not reveal the real owner, supporting that transfers occur between cryptographic addresses rather than identified people.

Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.31 Previous Years Questions > p. 118
Strength: 3/5
“Select the correct answer using the code given below. • (a) (i) only• (b) (ii) only• (c) Both (i) & (ii)• (d) Neither (i) nor (ii)• 25. With reference to 'Bitcoins', sometimes seen in the news, which of the following statements is/are correct? [2016] • (i) Bitcoins are tracked by the Central Banks of the countries.• (ii) Anyone with a Bitcoin address can send and receive Bitcoins from anyone else with a Bitcoin address.• (iii) Online payments can be sent without either side knowing the identity of the other. Select the correct answer using the code given below. • (a) (i) & (ii) only• (b) (ii) & (iii) only• (c) (iii) only• (d) (i), (ii) & (iii)• 26.”
Why relevant

The question snippet explicitly lists the claim that 'Anyone with a Bitcoin address can send and receive Bitcoins from anyone else with a Bitcoin address' as a notable statement about Bitcoins.

How to extend

A student could treat this as a contested claim and seek technical details (e.g., how addresses and transactions work on the blockchain) to verify or refute it.

Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > CRYPTOCURRENCIES > p. 160
Strength: 4/5
“A cryptocurrency is a digital money transferred over the internet. Cryptocurrencies are based on the decentralized ledger-based blockchain technology which seeks to make the currency system decentralized, unlike the present government-issued centralized form. Some popular cryptocurrencies are Bitcoin, Ethereum, etc. However, the cryptocurrencies have the following disadvantages: • These are not backed by any physical assets, unlike the gold reserve in case of fiat currencies. • It is still prone to hacking, and there have been instances of theft of Bitcoins from digital wallet, making them risky. • The anonymity in use of cryptocurrencies may actually facilitate several illegal activities like terror funding, smuggling, drugs trade, money laundering and other criminal activities.”
Why relevant

Explains cryptocurrencies use a decentralized ledger/blockchain and highlights anonymity and the ability to transfer digital money over the Internet.

How to extend

Combine this with basic knowledge that blockchain records transactions between addresses to judge whether addresses can transact peer-to-peer without central intermediaries.

Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > What are Crypto currencies? > p. 77
Strength: 4/5
“As people can accept any commodity with another if they want to like in a "Barter System", in the same way people may accept even these crypto currencies and gold also for any transaction purpose because as such they are not prohibited and it is not illegal to transact in crypto currencies or gold.• Crypto currencies are not issued by Government or RBI but rather encryption techniques are used to both create and control the number of units and verify its exchange. With crypto currencies, a chain of private computers - a network - is constantly working towards authenticating the transactions by solving complex cryptographic puzzles.”
Why relevant

States cryptocurrencies are not issued by governments and that a network of private computers authenticates transactions by solving cryptographic puzzles—describes decentralized transaction verification.

How to extend

Extend by noting that if a distributed network authenticates transactions between units, transactions between arbitrary addresses should be technically feasible, subject to network rules.

Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 8: Financial Market > 2020 > p. 245
Strength: 5/5
“• 1. It is a public ledger that everyone can inspect, but which no single user controls. • 2. The structure and design of blockchain is such that all the data in it are about cryptocurrency only. • 3. Applications that depend on basic features of blockchain can be developed without anybody's permission. Which of the statements given above is/are correct? • (b) 1 and 2 only • (a) 1 only • (d) 1 and 3 only • (c) 2 only • 2. If you withdraw ₹1,00,000 in cash from your Demand Deposit Account at your bank, the immediate effect on aggregate money supply in the economy will be: • (a) to reduce it by \overline{\xi}1,00,000 • (b) to increase it by \bar{x}1,00,000 • (c) to increase it by more than \bar{x}1,00,000 • (d) to leave it unchanged”
Why relevant

Describes the blockchain as 'a public ledger that everyone can inspect' and notes that applications can be developed without permission—implying open, permissionless transaction records.

How to extend

Combine this with the fact that public ledgers record transfers between addresses to infer that sending/receiving between addresses is permitted by the system design, though other constraints may apply.

Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > How will e-Rupee work? > p. 78
Strength: 2/5
“E-rupee would just be like cash, and I can make payment to anyone through the e-Rupee and the RBI's liability will move to the other person.”
Why relevant

Gives an analogy where e‑rupee works 'just like cash' and liability moves to the other person, suggesting a model where value transfers directly between parties.

How to extend

Use the cash-transfer analogy plus blockchain descriptions to reason whether Bitcoin transfers similarly move value between addresses without central re‑assignment.

Statement 3
Can online payments using Bitcoins be sent without either party knowing the real-world identity of the other party?
Origin: Direct from books Fairness: Straightforward Book-answerable
From standard books
Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > CRYPTOCURRENCIES > p. 160
Presence: 5/5
“A cryptocurrency is a digital money transferred over the internet. Cryptocurrencies are based on the decentralized ledger-based blockchain technology which seeks to make the currency system decentralized, unlike the present government-issued centralized form. Some popular cryptocurrencies are Bitcoin, Ethereum, etc. However, the cryptocurrencies have the following disadvantages: • These are not backed by any physical assets, unlike the gold reserve in case of fiat currencies. • It is still prone to hacking, and there have been instances of theft of Bitcoins from digital wallet, making them risky. • The anonymity in use of cryptocurrencies may actually facilitate several illegal activities like terror funding, smuggling, drugs trade, money laundering and other criminal activities.”
Why this source?
  • Explicitly states that cryptocurrencies have anonymity in use.
  • Connects this anonymity to facilitation of illegal activities (implying transactions can hide real-world identities).
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > What are Crypto currencies? > p. 77
Presence: 3/5
“As people can accept any commodity with another if they want to like in a "Barter System", in the same way people may accept even these crypto currencies and gold also for any transaction purpose because as such they are not prohibited and it is not illegal to transact in crypto currencies or gold.• Crypto currencies are not issued by Government or RBI but rather encryption techniques are used to both create and control the number of units and verify its exchange. With crypto currencies, a chain of private computers - a network - is constantly working towards authenticating the transactions by solving complex cryptographic puzzles.”
Why this source?
  • Describes cryptocurrencies as based on decentralized, encryption-driven blockchain technology.
  • Explains that a network of private computers authenticates transactions rather than a government issuer, which supports the notion of identity separation from issuance/verification.
Pattern takeaway: UPSC focuses on the 'Fundamental Architecture' of emerging technologies. They rarely ask about prices or specific companies; they ask about the *nature* of the system (e.g., anonymity, permissionless access, lack of central authority).
How you should have studied
  1. [THE VERDICT]: Conceptual Sitter. Solvable purely by understanding the definition of 'Decentralized' found in standard Economy texts (Singhania/Vivek Singh).
  2. [THE CONCEPTUAL TRIGGER]: Money & Banking > Evolution of Money. The shift from Fiat (Centralized) to Crypto (Decentralized).
  3. [THE HORIZONTAL EXPANSION]: Memorize the architecture: Public vs Private Blockchain, Proof of Work vs Proof of Stake, Hot vs Cold Wallets, 'Double Spending' problem, and the difference between a 'Coin' (Layer 1) and a 'Token' (Layer 2/Smart Contract).
  4. [THE STRATEGIC METACOGNITION]: When studying new tech, ask: 'What problem does this solve?' Bitcoin solves the 'trust' problem without a middleman (Central Bank). This functional understanding eliminates Statement 1 instantly.
Concept hooks from this question
📌 Adjacent topic to master
S1
👉 Decentralisation of cryptocurrencies vs central bank control
💡 The insight

References describe cryptocurrencies as blockchain-based, decentralized systems and note central banks' concern that private cryptos could weaken their control.

High-yield for UPSC questions contrasting private crypto systems and state monetary authority; helps answer questions on monetary sovereignty, CBDC rationale and policy responses. Study by comparing features of decentralised ledgers with central bank mandates and recent policy debates.

📚 Reading List :
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > CRYPTOCURRENCIES > p. 160
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > Why RBI launched e-Rupee? > p. 78
🔗 Anchor: "Are Bitcoins tracked by the central banks of countries?"
📌 Adjacent topic to master
S1
👉 Central bank functions and payment-system oversight
💡 The insight

Evidence outlines core central bank roles (issue currency, control money supply) and their regulatory/development role in national payment systems.

Core syllabus topic frequently tested in prelims/mains and interviews; links monetary policy to payment infrastructure and regulation (e.g., authorization of payment systems). Master by mapping RBI/central bank functions to policy tools and regulatory statutes.

📚 Reading List :
  • Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > Central bank > p. 38
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 10.Oversight of payment and settlement systems > p. 70
🔗 Anchor: "Are Bitcoins tracked by the central banks of countries?"
📌 Adjacent topic to master
S1
👉 Anonymity, risks and illicit use of cryptocurrencies
💡 The insight

Sources highlight anonymity in crypto transactions and associated risks (terror funding, money laundering, smuggling).

Useful for questions on financial regulation, law-and-order, and tech-enabled crimes; equips aspirants to discuss policy trade-offs between privacy and regulation. Prepare by studying risk examples, regulatory responses and enforcement challenges.

📚 Reading List :
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > CRYPTOCURRENCIES > p. 160
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > Why RBI launched e-Rupee? > p. 78
🔗 Anchor: "Are Bitcoins tracked by the central banks of countries?"
📌 Adjacent topic to master
S2
👉 Blockchain as a decentralized public ledger
💡 The insight

Multiple references describe cryptocurrencies as based on blockchain and a public ledger that anyone can inspect, which is central to how transactions are recorded and validated.

High-yield for UPSC: explains the technological basis of cryptocurrencies, links to questions on digital payments, financial regulation and cyber-security. Mastering this helps answer questions about how trust and verification work without a central authority and to compare centralized vs decentralized money systems. Prepare by understanding ledger properties, consensus role, and implications for regulation.

📚 Reading List :
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > CRYPTOCURRENCIES > p. 160
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 8: Financial Market > 2020 > p. 245
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > What are Crypto currencies? > p. 77
🔗 Anchor: "Can anyone with a Bitcoin address send and receive Bitcoins to or from anyone el..."
📌 Adjacent topic to master
S2
👉 Anonymity and associated risks in cryptocurrencies
💡 The insight

One reference highlights anonymity in use of cryptocurrencies and its potential to facilitate illegal activities.

Important for ethics, law and policy portions of the syllabus: ties to questions on anti-money laundering, terror financing, and regulatory responses to digital currencies. Useful for constructing balanced answers on benefits vs risks of crypto. Study by mapping privacy features to policy challenges and enforcement mechanisms.

📚 Reading List :
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > CRYPTOCURRENCIES > p. 160
🔗 Anchor: "Can anyone with a Bitcoin address send and receive Bitcoins to or from anyone el..."
📌 Adjacent topic to master
S2
👉 Cryptocurrencies as non-sovereign digital money
💡 The insight

References note that crypto is not issued by governments/RBI and relies on encryption and network authentication rather than central issuance.

Useful for questions on monetary policy, legal tender, and central bank digital currencies (CBDCs). Helps contrast fiat money and private digital currencies and support answers on why governments consider launching CBDCs. Study by comparing issuance, legal tender status, and policy tools available to central banks.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > What are Crypto currencies? > p. 77
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > How will e-Rupee work? > p. 78
🔗 Anchor: "Can anyone with a Bitcoin address send and receive Bitcoins to or from anyone el..."
📌 Adjacent topic to master
S3
👉 Anonymity/Pseudonymity in Cryptocurrencies
💡 The insight

Reference [2] directly discusses anonymity in cryptocurrency use and its consequences, which is central to whether parties know each other's real identities.

High-yield for UPSC questions on digital payments and cyber-enabled risks: explains why cryptocurrencies differ from bank-based systems, links to topics like money laundering/terror financing, and helps answer policy questions on regulation. Prepare by comparing anonymity features and real-world risks using source material and case examples.

📚 Reading List :
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > CRYPTOCURRENCIES > p. 160
🔗 Anchor: "Can online payments using Bitcoins be sent without either party knowing the real..."
🌑 The Hidden Trap

The 'Double Spending' Problem: This is the specific technical issue blockchain solves (preventing digital money from being copied and spent twice). A future question may ask *how* it is solved (via Timestamping/Consensus), distinguishing it from traditional digital banking.

⚡ Elimination Cheat Code

The 'Definition Contradiction' Hack: Statement 1 says Bitcoins are tracked by Central Banks. The *entire definition* of Bitcoin is a currency *free* from Central Bank control. A statement that contradicts the fundamental definition of the subject is always FALSE.

🔗 Mains Connection

Mains GS-3 (Internal Security & Economy): Link Bitcoin's 'anonymity' (Stmt 3) to the challenge of Money Laundering (PMLA) and Terror Financing. Contrast this with the 'Traceability' feature of CBDCs (e-Rupee), which is the state's counter-move to regain monetary sovereignty.

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SIMILAR QUESTIONS

CDS-I · 2017 · Q73 Relevance score: 2.56

Which of the following statements about Bitcoin is/are correct? 1. It is a decentralized virtual currency. 2. It is generated through complex computer software systems. 3. The Reserve Bank of India recognized it as a legal tender in January 2016. Select the correct answer using the code given below.

IAS · 2012 · Q41 Relevance score: 0.71

With reference to ‘stem cells’, frequently in the news, which of the following statements is/are correct? 1. Stem cells can be derived from mammals only. 2. Stem cells can be used for screening new drugs. 3. Stem cells can be used for medical therapies. Select the correct answer using the codes given below :