Blockchain Technology: Prospects and Challenges

Blockchain Technology: Prospects and Challenges

Worldcoin: The Iris-scanning Cryptocurrency


From UPSC perspective, the following things are important :

Prelims level : Worldcoin

Mains level : NA


Central Idea: Sam Altman, CEO of OpenAI, is reportedly raising $100 million for Worldcoin, a unique cryptocurrency.

What is Worldcoin?

  • Worldcoin, co-founded by Altman and Alex Blania in 2019, aims to provide every human being on Earth with a share of its digital token.
  • Worldcoin is a crypto project that seeks to establish a global identity and financial network for everyone.
  • It utilizes a device called the Orb, which scans people’s irises to verify their uniqueness and humanity.
  • Individuals who undergo the iris scan are rewarded with Worldcoin tokens.
  • The World App, developed by Worldcoin, enables users to make payments, purchases, and transfers using Worldcoin and other digital assets.
  • The project plans to launch in the first half of 2023 and distribute a total of 10 billion tokens, with 80% going to users.

Functioning of Worldcoin

  • Worldcoin’s founders aimed to freely distribute shares of the digital token to every person on the planet.
  • They envisioned it as a global distribution system for Universal Basic Income and a means to distribute profits generated by AI systems equally among people.
  • To ensure fair distribution, Worldcoin utilizes biometric iris scans through the Orb device.
  • The Orb scans the iris and converts it into a hash, which is impossible to recreate even if compromised.
  • The iris hash and the user’s public key hash are sent to Worldcoin servers, and if the person is new to the system, the hashes are added to the database and the company’s blockchain.

Challenges and criticisms

  • Worldcoin faces challenges regarding the accessibility of the Orb and expanding the user database.
  • The project plans to incentivize sign-ups by offering coupons or access to loans.
  • Concerns exist about the privacy and security of biometric data and potential misuse.
  • Questions arise about the feasibility and scalability of reaching unbanked or underbanked populations.
  • The value and utility of the Worldcoin token and its competitiveness with other cryptocurrencies or fiat currencies are also subject to scrutiny.

Back2Basics: Cryptocurrency

  • A cryptocurrency is a digital asset stored on computerised databases.
  • These digital coins are recorded in digital ledgers using strong cryptography to keep them secure.
  • The ledgers are distributed globally, and each transaction made using cryptocurrencies are codified as blocks.
  • And multiple blocks linking each other forms a blockchain on the distributed ledger.
  • There are estimated to be more than 47 million cryptocurrency users around the world.
  • These cryptocurrencies are created through a process called mining.


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Blockchain Technology: Prospects and Challenges

Virtual Digital Assets Regulation: India’s progressive Approach


From UPSC perspective, the following things are important :

Prelims level : Updates on the development of Virtual digital assets,

Mains level : Virtual digital assets, Money laundering and challenges and prevention

Central Idea

  • The regulation of new technologies can be a challenging task, as their rapid and constant change can create unintended consequences. History is full of examples where innovations were curtailed, such as the infamous Red Flag Act of the UK that ended up strengthening the motorcar industry in Europe. Today, India’s recent notification on anti-money laundering provisions for virtual digital assets businesses and service providers is a step in the right direction.

What is mean by Virtual Digital Assets?

  • Digital representations of value: Virtual Digital Assets refer to digital representations of value that can be transferred, stored, or traded electronically. These assets may include cryptocurrencies, tokens, or other forms of digital assets that are secured using cryptography and blockchain technology.
  • Intangible: Virtual digital assets are intangible and exist only in the digital realm, but they can be used as a medium of exchange, store of value, or investment.
  • Decentralized nature: Virtual digital assets are typically decentralized and operate independently of central authorities, making them appealing to many users. However, their decentralized nature also makes them susceptible to illicit activities such as money laundering and terrorism financing, which has led to the need for regulations and oversight.

How Virtual digital assets are linked with money laundering?

  • Anonymity: Virtual digital assets offer a degree of anonymity, which can be exploited by criminals to conceal their identities and activities.
  • Lack of regulations: The lack of comprehensive regulations in the virtual digital asset space makes it easier for criminals to launder money using these assets.
  • Cross-border transactions: Virtual digital assets can be used to conduct cross-border transactions with ease, making it easier for criminals to move money across jurisdictions and avoid detection.
  • Decentralized nature: The decentralized nature of virtual digital assets means that there is no central authority regulating the transactions, making it difficult to track and monitor illicit activities.
  • High liquidity: Virtual digital assets are highly liquid and can be easily converted into other forms of currency, making it easier for criminals to move money around and launder their proceeds.
  • Complex transactions: Some virtual digital asset transactions can be highly complex, making it difficult to trace the source of the funds and detect money laundering activities.

India’s approach to regulate virtual digital assets

  • Prevention of Money Laundering Act (PMLA) Act of 2002: PMLA enacted in 2002 to prevent and combat money laundering and related crimes. The act provides for the confiscation of property derived from, or involved in, money laundering, and also imposes penalties on individuals and entities involved in money laundering activities.
  • Extension of anti-money laundering provisions: India’s Union Finance Ministry, in a gazette notification, extended anti-money laundering provisions to virtual digital assets businesses and service providers, under the Prevention of Money Laundering Act (PMLA) Act of 2002.
  • Mandatory registration: Virtual digital assets platforms carrying out activities such as exchange between virtual digital assets and fiat currencies, exchange between one or more forms of virtual digital assets, transfer of virtual digital assets, safekeeping or administration of virtual digital assets or instruments enabling control over virtual digital assets, and participation in and provision of financial services related to an issuer’s offer and sale of a virtual digital asset, must register as a reporting entity with the Financial Intelligence Unit-India.
  • Implementation of know your customer and record-keeping measures: Reporting entity platforms such as CoinSwitch are now mandated to implement know your customer, record and monitor all transactions, and report to the Financial Intelligence Unit-India as and when any suspicious activity is detected.
  • Standardisation of norms: By extending anti-money laundering provisions to virtual digital assets, a framework has been created for virtual digital assets platforms to diligently monitor and take actions against malpractices, making the Indian virtual digital assets sector more transparent.
  • Compliance with global guidelines: The anti-money laundering provisions in India are in line with global guidelines put forward by the International Monetary Fund and the Financial Action Task Force.
  • Reconsideration of tax rates: With the mitigation of money laundering and terror financing risks through the PMLA notification, there is an opportunity for India to reconsider its tax treatment of virtual digital assets, which is currently an outlier both domestically and internationally.

How India can leverage G20 presidency?

  • Spearheading critical discussions on establishing a global regulatory framework for virtual digital assets.
  • Sharing its leadership and experience on this issue with other G20 nations.
  • Considering the steps taken by other G20 nations, such as Japan and South Korea’s establishment of a framework to license Virtual Asset Service Providers (VASPs), and Europe’s passing of the Markets in Crypto-Assets (MiCA) regulation by the European Parliament.
  • Using the G20 platform to coordinate and provide greater oversight on the domestic virtual digital assets ecosystem, which could provide much-needed assurance to everyday users as well as regulators.


  • India’s measured approach to regulating virtual digital assets is a step in the right direction. With India’s presidency of the G-20, it is an opportunity to establish a global regulatory framework for virtual digital assets. A progressive regulatory framework will establish India’s virtual digital assets leadership and instill the animal spirit in India’s innovation economy.

Mains Question

Q. What do you understand by mean by Virtual Digital Assets? Establish a link between virtual digital assets and money laundering. Discuss how India is taking measures to regulate virtual assets?

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Blockchain Technology: Prospects and Challenges

How Web3 differs from Web2?


From UPSC perspective, the following things are important :

Prelims level : Web 3.0

Mains level : Not Much


Central idea: The article discusses the key features of Web3, including its decentralized nature, peer-to-peer transactions, and greater control over data and digital assets for users.

What is Web3?

  • Web3, also known as Web 3.0, is the next generation of the World Wide Web that emphasizes decentralization, security, and user privacy.
  • It is essentially a vision of the internet where users have more control over their data, identities, and online interactions.
  • It is built on blockchain technology, which enables peer-to-peer transactions without the need for intermediaries such as banks, governments, or other third parties.
  • This decentralized approach to the web allows for greater transparency and trust, as well as more secure and private transactions.
  • Web3 technologies include blockchain platforms like Ethereum, IPFS (InterPlanetary File System) for distributed file storage, decentralized identity systems like uPort, and decentralized marketplaces like OpenBazaar.

Features of Web 3





Decentralised Centralised


Peer-to-peer Rely on intermediaries

Data ownership and control

Users have control Large corporations have control


Challenges for Web3:



Current blockchain infrastructure can only handle a limited number of transactions per second.

User Adoption

Despite being around for over a decade, blockchain technology is still relatively unknown to the general public.


Web3 is being developed by different organisations, each with their own unique vision for the technology, leading to challenges in integration.


Technical expertise is required to use and understand Web3, which may be a barrier for some users.


Examples of Web3 use:



Built on blockchain technology, cryptocurrencies enable secure, decentralised transactions without the need for intermediaries.

Decentralised Finance

Aims to build a new financial system on top of blockchain technology. DeFi applications enable users to borrow, lend, and trade crypto.

Decentralised storage

Used to create decentralised social networks and develop decentralised identity verification systems.


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Blockchain Technology: Prospects and Challenges

What are Stablecoins?


From UPSC perspective, the following things are important :

Prelims level : Stablecoins

Mains level : Read the attached story


The US Congress (Parliament) has made another attempt to create a legislative framework for the increasingly popular stablecoins, a sort of cryptocurrency that is pegged to a particular commodity or currency.

What are Stablecoins?

  • Stablecoins are cryptocurrencies designed to maintain a stable value, typically by being pegged to a stable asset such as the US dollar.
  • Investing in stablecoins can help mitigate market volatility because they are less susceptible to price fluctuations than other cryptocurrencies such as Bitcoin or Ethereum or any other.

Types of stablecoins

Fiat-backed stablecoins Backed by reserves of fiat currency held in a bank account or other secure location. Example: Tether (USDT)
Commodity-backed stablecoins Backed by reserves of a physical commodity, such as gold or silver. Example: PAX Gold (PAXG)
Algorithmic stablecoins Use algorithms or smart contracts to maintain a stable value. Example: Dai stablecoin (DAI)


How can Stablecoin mitigate market volatility?

Hedging against volatility
  • Help investors hedge against volatility and reduce their risk exposure.
  • Pegged to a stable asset, which can provide a haven during market turbulence.
  • If the value of Bitcoin or Ethereum drops suddenly, investors can move their funds into stablecoins to protect their portfolio from further losses.
Greater flexibility in transferring funds
  • Greater flexibility and convenience compared to traditional fiat currencies.
  • Quickly and easily transferred between wallets and exchanges, making them ideal for cross-border transactions.
  • Investors take advantage of investment opportunities in other markets and avoid currency exchange fees and delays.
Arbitrage trading
  • Used for arbitrage trading, which involves buying an asset in one market and selling it in another market for a higher price.
  • As stablecoins are pegged to a stable asset, investors can quickly move funds between exchanges without worrying about price fluctuations, making arbitrage trading easier and potentially more profitable.


What are the risks?

Stability of the asset
  • Stablecoins are reliant on the stability of the asset they are pegged to.
  • If the value of that asset drops, it can lead to a drop in the stablecoin’s value as well.
  • This could result in losses for investors who hold the stablecoin.
Transparency and regulation
  • There are concerns over the transparency and regulation of stablecoin issuers.
  • This could result in a loss of trust in the stablecoin and a subsequent drop in its value.
  • There is no proper regulation and oversight.
  • There is a risk that stablecoin issuers may engage in fraudulent or unethical behaviour, which could lead to losses for investors.
  • It is important for investors to carefully assess the reputation and credibility of the stablecoin issuer before investing in a stablecoin.



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Blockchain Technology: Prospects and Challenges

Money Laundering laws will now cover Cryptocurrency Trade


From UPSC perspective, the following things are important :

Prelims level : PMLA , Cryptocurrencies

Mains level : Regulation of illicit crypto trade


The government has imposed the Prevention of Money-laundering Act, 2002 on cryptocurrencies or virtual assets as it looks to tighten oversight of digital assets.

Central idea: The Prevention of Money-laundering Act, 2002, now covers various financial activities related to virtual digital assets, including exchanges between fiat currencies and digital assets, transfer and storage of digital assets, and provision of financial services related to the sale of digital assets by an issuer.

What are Cryptocurrencies?

  • Cryptocurrencies are digital or virtual currencies that use encryption techniques to secure and verify transactions and control the creation of new units.
  • They operate independently of central banks and financial institutions and use a decentralized ledger technology called blockchain to record transactions.
  • They can be used to make purchases, transfer funds, or as a store of value, and some are designed to facilitate specific use cases, such as smart contracts.
  • Bitcoin is the first and most well-known cryptocurrency, but there are thousands of others, including Ethereum, Ripple, and Litecoin.
  • Cryptocurrencies can be purchased on cryptocurrency exchanges or obtained through mining, a process in which computers solve complex mathematical problems to validate transactions and earn new cryptocurrency units as a reward.

Why regulate cryptocurrencies?

  • Consumer protection: Cryptocurrencies are highly volatile and can be subject to fraud, scams, and other forms of financial crime.
  • Preventing money laundering and terrorist financing: Cryptocurrencies can be used to anonymously transfer funds, making them potentially attractive to criminals and terrorists.
  • Systemic risk: Cryptocurrencies are not currently part of the traditional financial system, but they could potentially have an impact on it if they were to become more widely adopted.
  • Taxation: Cryptocurrencies can be used to evade taxes or hide assets. Regulation can help ensure that cryptocurrency transactions are properly taxed and that tax evasion is prevented.
  • Market stability: being highly volatile, regulation can help promote market stability and prevent excessive speculation or manipulation of cryptocurrency markets.

What is the recent move?

  • Indian crypto exchanges will have to report suspicious activity to the Financial Intelligence Unit India (FIU-IND).
  • The move is in line with the global trend of requiring digital-asset platforms to follow anti-money laundering standards similar to those followed by other regulated entities like banks or stock brokers.

Recent regulatory moves

  • In the Budget for 2022-23, finance ministry had brought a 30% tax on income from transactions in such assets.
  • Also, to bring such assets under the tax net, it introduced a 1% TDS (tax deducted at source) on transactions in such asset classes above a certain threshold.
  • Gifts in crypto and digital assets were also taxed.

Back2Basics: Prevention of Money Laundering Act (PMLA)

  • PMLA, 2002 is an Act of the Parliament of India enacted by the NDA government to prevent money laundering and to provide for confiscation of property derived from money laundering.
  • It was enacted in response to India’s global commitment (including the Vienna Convention) to combat the menace of money laundering.
  • PMLA and the Rules notified there under came into force with effect from July 1, 2005.
  • The act was amended in the year 2005, 2009 and 2012.


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Blockchain Technology: Prospects and Challenges

In news: Crypto Awareness Campaign


From UPSC perspective, the following things are important :

Prelims level : Cryptocurrency

Mains level : Issues with Cryptocurrency


The Investor Education and Protection Fund (IEPF) will launch an outreach programme soon to create awareness of cryptocurrencies.

What is Cryptocurrency?

  • A cryptocurrency is a digital asset stored on computerised databases.
  • These digital coins are recorded in digital ledgers using strong cryptography to keep them secure.
  • The ledgers are distributed globally, and each transaction made using cryptocurrencies are codified as blocks.
  • And multiple blocks linking each other forms a blockchain on the distributed ledger.
  • There are estimated to be more than 47 million cryptocurrency users around the world.
  • These cryptocurrencies are created through a process called mining.

Investor Education and Protection Fund (IEPF)

  • The Investor Education and Protection Fund (IEPF) is managed by the IEPF Authority, which was set up in 2016 under the provisions of Section 125 of the Companies Act, 2013.
  • The Authority is entrusted with promoting awareness among investors, makes refunds of shares, unclaimed dividends, matured deposits and debentures and so on to rightful claimants.
  • As for investment education, the idea is to reach out to household investors, housewives and professionals alike in rural and urban areas and teach them the basics.
  • Focus areas include primary and secondary capital markets, various saving instruments, the instruments for investment, making investors aware of dubious Ponzi and chit fund schemes and existing grievance redressal mechanisms, among other things.
  • Until the end of October, it had conducted more than 65,000 awareness programmes covering 30 lakh citizens.

Why is there a concern about cryptocurrency?

  • RBI caution: The Reserve Bank of India (RBI) has recommended framing legislation on the sector. It is of the view that cryptocurrencies should be prohibited.
  • Fiscal stability at stake: The crypto dilemma stems from concerns about the unregulated currency having a destabilising effect on the monetary and fiscal stability of a country.
  • Involved in unlawful activities: Further, crypto exchanges in India are being investigated for their alleged involvement in unlawful practices such as drug trafficking, money laundering, violating foreign exchange legislation and evasion of GST.
  • High volatility: Cryptocurrency investing can be a complex and risky endeavour as the category is extremely volatile and works round the clock.

Will an outreach programme help?

  • Regulation is must: Apart from the outreach programme, there has to be a regulatory mechanism for the crypto sector.
  • Messaging has to be right: If the government takes a heavy-handed approach and starts saying things like virtual currency is not legal in India that will not be entirely true.

Present regulation in India

  • RBI has banned banks and other regulated entities from supporting crypto transactions.
  • The Government has confirmed that expenditure incurred in mining cryptocurrency is considered capital expenditure and not a cost of acquisition.
  • Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 was introduced by the Centre.

Way forward

  • Crypto assets are borderless and therefore, any legislation (for regulation or for banning) would require international collaboration to prevent regulatory arbitrage.
  • The collaboration must entail an evaluation of risks and benefits and the evolution of common taxonomy and standards.


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Blockchain Technology: Prospects and Challenges

Private: Significance of Ethereum’s Merge for the future of cryptocurrencies


From UPSC perspective, the following things are important :

Prelims level : Ethereum Merge Event

Mains level : Cryptyocurrencies


Ethereum’s shift of its consensus algorithm from proof-of-work (PoW) to environment-friendly proof-of-stake (PoS) in an event called ‘The Merge’ recently took place.

One would wonder if the Merge Event has actually any relation to any corporate merger or acquisition!

What is Ethereum?

  • Ethereum is one of the most used platforms by developers to build decentralised apps (dApps), smart contracts, and even crypto tokens.
  • The platform’s currency, Ether is only second to Bitcoin (BTC) in terms of market capitalisation.
  • The change in the way Ethereum builds the blockchain comes with not just environmental consequences, but also major cyber and financial security implications.

What is a Merge?  

  • The Merge is an upgrade to the way transactions are validated on the Ethereum blockchain.
  • It moves the network proof-of-work (PoW) system to proof-of-stake (PoS) system, which is designed to be more environmentally sustainable and faster.

What does PoS and PoW refer to?

  • PoS and PoW are consensus mechanisms through which transactions on blockchains are validated.
  • PoW consumes more energy since it allows all miners on a network to try and validate a transaction.
  • As a result, more computers attack a transaction and hence consume more energy.
  • PoS removes miners from the equation, replacing them with entities called ‘validators’.
  • These validators put up a stake (at least 32ETH) in order to gain the right to validate transactions. Only the top stakeholders are rewarded for their work.
  • Their stakes are held in a central wallet, and they are penalized for mistakes or frauds.
  • Common centres for mining included China (before a near total crypto ban), the US, Russia, and Kazakhstan — countries with cheap electricity rates and colder climates.

Why is there a need for a new mechanism?

(1) Power Saving

  • Decentralised transactions are processed on blockchains using consensus mechanisms.
  • Ethereum’s former method, ‘proof-of-work’, which is also used by Bitcoin, needs powerful mining hardware that consumes a lot of electricity and generates enormous amounts of heat.
  • This energy is then used to process extremely difficult mathematical puzzles, the solution of which would let new transactions be added to the blockchain so as to reward the miners with crypto.
  • Many environmentalists, policy makers, and regulators have strongly criticised the impact of Bitcoin mining on local communities.
  • Ethereum’s website admitted that their crypto’s total annualised power consumption nearly matches that of Finland while its carbon footprint is comparable to Switzerland.

(2) Global Crackdown

  • For some time, European countries even mulled a crypto mining ban, while China actually carried out a nationwide crackdown on crypto miners, sending them fleeing overseas.
  • Probably as a response to the backlash, Ethereum has decided to switch to a ‘proof-of-stake’ consensus mechanism.
  • The crypto owners will stake their own coins in order to serve as collateral and help process new blockchain transactions, in return for rewards.

Significance of the merge


  • According to the Ethereum Foundation, the Merge will reduce overall energy consumption of the Ethereum network by 99.95%.
  • Blockchains have a short history so far, but in that history, the Merge has become one of the most widely publicized and awaited events.
  • It has been in the works for six years and 15 September marked the end of that build-up.

Which other cryptocurrencies are changing to proof-of-stake now?

  • For now, no other top coin is planning an Ethereum-style Merge.
  • After Bitcoin, Dogecoin [DOGE] is the largest proof-of-work based cryptocurrency.
  • It was initially created as a joke by its founders. After that comes Ethereum Classic [ETC], formerly part of Ethereum before a community schism.
  • Ethereum Classic has made it clear that it is loyal to the proof-of-work mechanism.


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Blockchain Technology: Prospects and Challenges

EU’s Markets in Crypto-Assets (MiCA) Law


From UPSC perspective, the following things are important :

Prelims level : MICA, Stablecoins

Mains level : Read the attached story

The Markets in Crypto-Assets (MiCA) law of European Parliament is the first comprehensive regulation for cryptos, and some expect it to become a trendsetter for crypto regulation globally.

What is MiCA Legislation?

  • The MiCA law seeks to address concerns like money-laundering, protection of consumers and investors, accountability of crypto firms, stablecoins and the environmental footprint of crypto mining.
  • It would regulate the “wild west” of crypto assets and provide legal certainty for those issuing crypto assets, while ensuring high standards for investors and consumers.
  • It also excludes non-fungible tokens, but the EU may make a horizontal legislation for NFTs in 18 months, after a separate assessment.

How will MiCA regulate stablecoins?

  • The efficacy of stablecoins, which claim to be less volatile that other cryptos, came into question after the crash of some crypto-currencies.
  • The MiCA would mandate that stablecoin issuers maintain minimum liquidity to provide for sudden large withdrawals by users, and the reserves must also be protected from insolvency.
  • The European Banking Authority (EBA) has been brought in to supervise stablecoins, and the law asks stablecoin issuers to provide claims to investors free of charge.
  • In addition, large coins which are used as a means of payment will be capped at €200 million worth of transactions per day.

How will the new law regulate money laundering?

  • MiCA requires the EBA to maintain a public register of non-compliant crypto asset service providers (CASPs).
  • Additional checks will be required, in line with the EU Anti-Money-Laundering (AML) framework.

How does it address green concerns?

  • Under MiCA, crypto companies will be required to declare their environmental and climate footprint.
  • The European Securities and Markets Authority will develop regulatory technical standards on methodologies, content and presentation of such information.
  • The EC will also have to provide a report on the impact of crypto assets on environment.
  • It would introduce mandatory minimum sustainability standards for mining mechanisms, especially the proof-of-work system which raises overall computing power.

Will it affect Indian regulations?

  • India’s crypto regulations seem to have taken a back seat at the moment.
  • Industry executives and experts say the government and industry are more concerned about taxation.
  • India levied a 30% tax on income from transfer of cryptos from April, and added a 1% tax deduction at source from 1 July.
  • This, along with the overall bear market, has depressed trading volumes, and revenues of crypto exchanges.
  • Indian regulators are also expected to consider rules being developed in the US before taking concrete decisions.

Back2Basics: Stablecoins

  • Stablecoins are cryptocurrencies where the price is designed to be pegged to a cryptocurrency, fiat money, or to exchange-traded commodities (such as precious metals or industrial metals).
  • Advantages of asset-backed cryptocurrencies are that coins are stabilized by assets that fluctuate outside of the cryptocurrency space, that is, the underlying asset is not correlated, reducing financial risk.
  • Bitcoin and altcoins are highly correlated, so that cryptocurrency holders cannot escape widespread price falls without exiting the market or taking refuge in asset backed stablecoins.
  • Furthermore, such coins, assuming they are managed in good faith, and have a mechanism for redeeming the asset(s) backing them, are unlikely to drop below the value of the underlying physical asset, due to arbitrage.


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Blockchain Technology: Prospects and Challenges

Cryptos and a CBDC are not the same thing


From UPSC perspective, the following things are important :

Prelims level : Bitcoin

Mains level : Paper 3- How CBDC is different from Cryptocurrencies?


Cryptocurrency will be discouraged via taxation and capital gains provisions. This was the message from the Finance Minister during the Budget discussion in Parliament.

Growing worry about the cryptocurrencies

  • The Governor of the Reserve Bank of India, in February, highlighted two things.
  • First, “private cryptocurrencies are a big threat to our financial and macroeconomic stability”.
  • Second, “these cryptocurrencies have no underlying (asset).
  • Clearly, statements from the RBI indicate a growing worry since the proliferation of cryptos threatens the RBI’s place in the economy’s financial system.
  • This threat emerges from the decentralised character of cryptos based on blockchain technology which central banks cannot regulate and which enables enterprising private entities to float cryptos which can function as assets and money.
  • The total valuation of cryptos recently was upward of $2 trillion — more than the value of gold held globally.
  • Challenges in banning it: Cryptos which operate via the net can be banned only if all nations come together.
  • Even then, tax havens may allow cryptos to function, defying the global agreement.

Crypto as currency

  • A currency is a token used in market transactions. 
  • Historically, commodities (such as copper coins) have been used as tokens since they themselves are valuable.
  • But paper currency is useless till the government declares it to be a fiat currency.
  • Paper currency derives its value from state backing.
  • Cryptos are a string of numbers in a computer programme. And, there is no state backing. 
  • Their acceptability to the well-off enables them to act as money.
  • So, cryptos acquire value and can be transacted via the net.
  • This enables them to function as money.
  • Solving the problem of double spending:  Fiat currency has the property that once spent, it cannot be spent again except through forgery, because it is no more with the spender.
  • But, software on a computer can be used repeatedly.
  • Blockchain and encryption have solved the problem by devising protocols such as ‘proof of work’ and ‘proof of stake’. 

Why CBDC is not a solution

  • A Central Bank Digital Currency (CBDC) will not solve the RBI’s problem since it can only be a fiat currency and not a crypto.
  • Blockchain enables decentralisation.But, central banks would not want that.
  • Further, central bank would want a fiat currency to be exclusively issued and controlled by them.
  • But, theoretically everyone can ‘mine’ and create crypto.
  • So, for the CBDC to be in central control, solving the ‘double spending’ problem and being a crypto (not just a digital version of currency) seems impossible.
  • Validating transaction: A centralised CBDC will require the RBI to validate each transaction — something it does not do presently.
  • Once a currency note is issued, the RBI does not keep track of its use in transactions.
  • Keeping track will be horrendously complex which could make a crypto such as the CBDC unusable unless new secure protocols are designed.


CBDCs at present cannot be a substitute for cryptos that will soon begin to be used as money. This will impact the functioning of central banks and commercial banks.

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Blockchain Technology: Prospects and Challenges

Virtual Digital Assets


From UPSC perspective, the following things are important :

Prelims level : Taxing of Crypto assets

Mains level : Cryptocurrencies regulation in India

The government has clarified that investors won’t be allowed to offset losses in one crypto asset against gains in another, and that crypto mining infrastructure costs will not be included in the cost of acquisition to be claimed as a deduction.

How are crypto investments taxed?

  • The Union Budget 2022-23 in February proposed that gains from virtual digital assets or crypto assets would be taxed at 30% irrespective of the individual’s income tax slab.
  • In addition, a 1% tax deducted at source or TDS was introduced on the transfer of such assets.
  • The government did not say if crypto assets are to be treated as currency, commodity, or security, and a clarification is expected in due course via separate legislation.
  • Gifting of crypto assets to non-relatives is also taxed in the hands of the recipient if the value exceeds ₹50,000 in a year.

How does crypto tax differ from others?

  • If listed shares are sold within 12 months of purchase, short-term capital gains (STCG) tax is applied on the gains, while beyond one year, long-term capital gains (LTCG) tax is levied.
  • STCG is levied at 15.6%, including cess, while LTCG for gains over ₹1 lakh is 10.4%, including cess.
  • There is no provision of long-term or short-term crypto assets, while gains are taxed at a flat rate of 30%.
  • Investors in equities can offset the loss in one stock against another, while they can carry forward both short-term and long-term loss for eight assessment years.
  • This has not been allowed in crypto.

How will crypto tax impact investors?

  • In a fiscal year, if an investor had made gains in bitcoin and losses in ether, he or she will have to pay tax at 30% on gains in bitcoin.
  • Further, the absence of loss set-off provision would cause a double whammy —paying taxes on gains and no offset of losses.
  • Tax experts believe that in certain cases, the effective rate of taxation can even cross 100% on crypto investments.

How will miners be affected?

  • The government has clarified that mining infrastructure will also not be eligible to be deducted as the cost of acquisition.
  • So far, it was understood by some that crypto generated during the ‘mining’ process is taxable only on the profits, after accounting for mining expenses such as electricity.
  • But with the latest explanation, a 30% tax plus cess and surcharges will be levied on such transactions.
  • Experts believe that crypto mining operations would become non-profitable under the current announcement.

Will crypto tax trigger an investor exodus?

  • The crypto industry has been unequivocal in criticizing the tax proposals.
  • Thanks to the tearing rally in crypto assets over the past two years, it is estimated by some that more than 20 million Indian investors have poured more than ₹1 trillion into cryptos.
  • However, the industry leaders fear that the lack of provision to offset losses will drive away users from KYC-compliant exchanges and platforms to the underground peer-to-peer grey market, which would defeat the purpose of regulation.


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Blockchain Technology: Prospects and Challenges

What is Blockchain Gaming?


From UPSC perspective, the following things are important :

Prelims level : Blockchain technology, NFTs

Mains level : Blockchain gaming

Many Indian gaming companies have expressed their interest in introducing elements of Blockchain technology into their games in the near future.

What is Blockchain?

  • Blockchain is a decentralised database that stores information.
  • It relies on technology that allows for the storage of identical copies of this information on multiple computers in a network.

What are blockchain games?

  • To revisit our definition of blockchain games: they are online video games that are developed by integrating blockchain technology into them.
  • It can be diversified into the following components-

(1) Non-fungible tokens

  • NFTs represent in-game virtual assets that can be owned by players, such as maps, armour or land.
  • These NFTs act as asset tags, identifying ownership of the in-game assets, and are stored on the blockchain.
  • Being on the blockchain allows the player to have a secure record of ownership of the in-game assets and also gives the assets the ability to outlive the game itself.
  • Based on the manner in which the games are designed, it also allows for the in-game assets to be transferred from one game to another.
  • It also creates transparency, since ownership records can independently be verified by any third party as well.
  • In doing so, it makes in-game assets marketable and creates a decentralized market, where they can be bought and sold by people.

(2) Cryptocurrency

  • Cryptocurrency, such as tokens based on the Ethereum blockchain, may be used for the purchase of in-game assets.
  • These in-game purchases usually enable gamers to buy items like extra lives, coins and so on directly from the game.

(3) Gaming coins

  • Gaming coins, such as Axie Infinity (ACS) and Enjin Coin (ENJ), are in-game cryptocurrency which may be acquired and then used for the purchase of in-game assets.
  • These gaming coins may be purchased from crypto exchanges (and eventually be traded on these crypto exchanges as well) or, in certain cases, be acquired as winnings in games that have adopted the ‘play-to-earn’ model.
  • In such games, gamers are rewarded for dedicating their time and skill to play the game with gaming coins and in-game assets.

Need to regulate such games

  • By making in-game assets available for purchase, developers and publishers stand to earn revenue from the sale of such assets.
  • They may also embed certain rules when implementing the code for in-game assets such that a fee is paid to them every time a certain action is taken,
  • It also involves transfers of assets from one player to another.
  • It needs to be ensured that if it is permissible to offer such games in the Indian Territory and also offers protection in the form of intellectual property rights.
  • Other concerns, such as privacy and cyber security, along with how financial regulations would apply to blockchain games, would also need to be addressed.

Regulatory aspects in India

Most of the gaming laws were brought into effect prior to the internet era and, therefore, only contemplate regulation of gaming activities taking place in physical premises.

(A) Legality Check

  • Since blockchain is merely the underlying technology, there is no express regulation in India.
  • It would, however, be relevant to explore the legality of the games from the lens of existing Indian gaming regulation.
  • Most Indian states regulate gaming on the basis of a distinction in law between ‘games of skill’ and ‘games of chance’.
  • Staking money or property on the outcome of a ‘game of chance’ is prohibited and subjects the guilty parties to criminal sanctions.
  • However, placing any stakes on the outcome of a ‘game of skill’ is not illegal per se and may be permissible.
  • As per two seminal judgments of the Supreme Court on this aspect, the Supreme Court recognized that no game is purely a ‘game of skill’ and almost all games have an element of chance.

(B) Dominant Element Test

  • As such, a ‘dominant element’ test is to be utilized to determine whether chance or skill is the dominating element in determining the result of the game.
  • This ‘dominant element’ may be determined by examining whether factors such as superior knowledge, training, experience, expertise or attention of a player have a material impact on the outcome of the game.
  • While the outcomes of any ‘games of skill’ are affected by these factors, outcomes of ‘games of chance’ are premised on luck and are largely independent of the skills of the players involved.

(C) Gaming house regulations

  • The Delhi District Court has, in the past, held that a gaming portal would be covered within the definition of a ‘common gaming house’.
  • This would be subjected to conditions where the gaming developers were to take commission / earn revenue from the game offered.
  • This is because such portals merely seek to replace the brick and mortar common gaming houses that Indian law currently envisages and has outlawed.

Where does blockchain gaming lie within this framework?

  • There is currently a lacuna in gaming law and there are lingering question marks on its interpretation and applicability to online gaming.
  • As the law currently stands, each blockchain game must first pass muster as a ‘game of skill’, as against a ‘game of chance’, to legally be made available in most Indian states.
  • In the past, the Supreme Court has rejected the notion of video games being ‘games of skill’.

Possible protections available to blockchain games

(a) Patents:

  • For a blockchain game or any of its elements to be patented in India if it meets the requirements of novelty, involving an inventive step, and industrial application.
  • In terms of Section 3(k) of the Patent Act, 1970, computer programs are per se not inventions and hence, cannot be patented.
  • However, judicial pronouncements in the past have clarified that if an invention has a technical contribution or a technical effect and is not merely a computer program per se, then it would be patentable.

(b) Trademarks:

  • A trademark is used as an identifying mark to determine the source of a particular good or service, and is obtained to protect the goodwill and reputation of the brand.
  • Any distinguishing mark in a blockchain game or NFT that would allow consumers to identify the source of that particular game or NFT may be trademarked.

(c) Copyrights:

  • In India, artistic work, musical work, cinematographic films, dramatic works, sound recordings and computer software are capable being of being protected under copyright law.
  • Although there is no specific provision in the Copyright Act that deals with video games, copyright protection of video games may be sought under the category of ‘multimedia products’.
  • Similar to the position with trademarks, the process of obtaining a copyright for a blockchain game would be the same as any other online video game.

Future roadmap

  • The Finance Ministry had announced in late-2021 that The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 would seek to prohibit all private cryptocurrencies.
  • If the legislature does indeed successfully, then, to the extent that existing blockchain games rely on cryptocurrencies, they would be considered illegal in India.
  • Independent of this, the Budget announced that the income from the transfer of any ‘virtual digital assets’ (which include cryptocurrency and non-fungible tokens) would be subject to income tax at the rate of 30%.
  • Policy pronouncements of this nature would need to be carefully considered by publishers of blockchain games while designing their pricing models.



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Blockchain Technology: Prospects and Challenges

Beyond the hype of blockchain, a look at its reality


From UPSC perspective, the following things are important :

Prelims level : Blockchain technology

Mains level : Paper 3- Applications of blockchain and challenges


Blockchain is a fascinating data structure that generates great curiosity. However, there is a lot of hype around the concept and its adoption in diverse fields seems to be faith-based, driven by unsubstantiated vendor and consultant claims.

Two main functional properties of blockchain

  • A blockchain is a sequential append-only public bulletin board of transaction records with two main functional properties. 
  • 1] Verification by peers: What can get added is reconciled by multiple participating  peers following a pre-decided consensus protocol.
  • This process cannot be gamed under the assumption that a majority of the unrestricted number of peers are honest.
  • 2] Immutable record: recryptographically ensured that it  cannot be altered.
  • Each participating peer normally has their own copy of the entire bulletin board, with identical content, and they can read and further copy at will.

Applications and their limits

  • Private blockchain: A “permissioned” or private blockchain has only pre-identified participating peers.
  • Hence, collusion is possible and integrity can only be ensured through regulations.
  • Without political decentralisation, consensus does not imply safety, and this is no different from centralisation in its threat model.
  • Privacy concern is not addressed: Despite many claims to the contrary, the blockchain structure has nothing to do with the highly-nuanced notion of privacy, or even the limited secrecy aspect of it.
  • To ensure secrecy of the bulletin board records, one has to fall back on traditional and well-established notions from cryptography — like encryption, key management and zero-knowledge proofs.
  • “Consensus” is inapplicable when there is only one authority responsible for the integrity of the transactions, for example, the Election Commission of India when a vote is cast in the privacy of a polling booth or a person is added or removed from a voters’ list.
  • Issues with use for voting purpose: Also, voting is not the only example of the inadequate analysis of the applicability of blockchain, and there are proposals for using them for land records, asset registers, etc.
  • Most such proposals do not pass muster for reasons similar to voting.
  • The role of blockchain in RBI’s digital currency proposal is similarly doubtful, and convincing methods independent of “consensus” need to be developed to ensure the correctness and verifiability of transactions while protecting user privacy.

Issues with application for cyrptocurrencies

  • Macroeconomic implications not clear: Currency properties and monetary policies have evolved over thousands of years of bartering, and it is not clear that cryptocurrencies are consistent with them or that the larger macroeconomic implications of cryptocurrencies are well understood.
  • Crypto assets derive their values from their potential to be exchanged for other currencies.
  • Uncertain price determination: Since only a limited set of commodities are traded with crypto assets,  their price determinations with respect to sovereign fiat currencies are uncertain.
  • Potential to increase inequality: Apart from the crucial price stabilisation issues, their potential to further inequality is also considerable.
  • Environmental impact: The total carbon footprint of cryptocurrencies is equivalent to that of a few megacities, and it does seem ungainly, energy-inefficient and unsustainable to mine assets this way.

Way forward

  • What may help in many of these applications is just the immutable public bulletin board part of a blockchain, with or without encryption and zero-knowledge proofs.
  • This may be simply achieved by the concerned authority periodically publishing the bulletin board in a publicly downloadable forum, and using hash chains verifiable by all to make alterations impossible.
  • Given the carbon footprint associated with cryptocurrencies, it requires regulation and taxation, especially for the potential environmental impacts and because only a few participate.

Consider the question “What is blockchain technology? What are its potential applications and concerns with these applications?” 


Blockchain is certainly an elegant concept whose properties and potential require careful research. The hype of treating them as solutions for everything with not-so-thoughtful use cases is perhaps techno-determinism at its worst.

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Blockchain Technology: Prospects and Challenges

After the Budget’s ‘crypto signal’, India awaits reform


From UPSC perspective, the following things are important :

Prelims level : NFTs

Mains level : Paper 3- Taxing the transactions in cryptocurrencies


In the Union Budget speech, Finance Minister Nirmala Sitharaman announced a 30% flat tax rate levied on any gains made from the transfer of virtual assets including cryptocurrencies and Non-Fungible Tokens (NFTs).

What is cryptocurrency?

  • Cryptocurrency (crypto) consists of a digital denomination designed to work as a medium of exchange through a distributed computer network (a blockchain) that is not reliant on any central authority such as a government or a bank for its upholding and maintenance.
  • Legal status: The announcement of the tax by the Finance Minister now leads to the assumption that crypto is legal in India.
  • Foreseeable are changes that would, down the road, legitimize and formally legalize the activities of crypto start-ups and enable them to access the necessary support system which might not have been available previously.

What are the implications of taxing cryptocurrencies in India?

  • While critics are right in observing that the 30% flat tax rate is a harsh rate, this is a premium and price well-worth paying in exchange for what is effectively a ruling-out of prospects for a total ban on crypto by the central government.
  • Scope for innovation: The high tax rate would inevitably hamper the willingness of investors to convert cryptocurrencies into national fiat, this may, in turn, open up more doors for technologically savvy and innovation-minded investors.
  •  The extremely high tax rate and the fact that the losses cannot be offset would invariably propel investors to turn to alternative means of storing and undertaking transactions in cryptocurrencies, without foregoing the significant losses involved as they “switch” back into the rupee.
  • An inadvertent upside of this, then, is the prospective conversion and reallocation of crypto-funds from one form to another.
  • Such transformations would involve DeFi (Decentralised Finance) activities such as staking, lending, and providing liquidity, among others.

Scope for DeFi in India

  • DeFi (or “decentralized finance”) is “an umbrella term for financial services on public blockchains.
  • With DeFi, one can do most of the things that banks support — earn interest, borrow, lend, buy insurance, trade derivatives, trade assets, and more — but it is faster and does not require paperwork or a third party. 
  • DeFi is global, peer-to-peer (meaning directly between two people, and not routed through a centralised system), pseudonymous, and open to all.
  •  The processes highlighted above would drive innovation in the field of Indian DeFi.


  • Low participation due to high rate: The community of small and medium-sized enterprises (SMEs) and lower-end high net-worth individuals are going to find it most difficult to access the ecosystem given the substantial barriers posed by the tax rates.
  • Lack of clarity: Additionally, when it comes to India’s crypto policy at large, there is a fundamental lack of clarity in aspects other than taxation.
  • There appears to be a push to treat crypto as purely an asset class than a currency.
  • The consolation offered by the Government in the form of the Reserve Bank of India’s CBDC, or Central Bank Digital Currency, will definitely help in pushing for the adoption of digital currencies, but, equally, defeats the fundamental purpose of cryptocurrency, which is decentralization.


  • Reduce the tax rate:  There is a need to reduce tax rates in the future, though this must be weighed against considerations concerning government revenue and the need to curb speculative bubbles surfacing in relation to the currency.
  • Incorporation of insights: The second reform constitutes the incorporation of insights from seasoned partners from international communities, the key should rest with engaging these individuals for their insights and advice on the best practices associated with cryptocurrency policymaking.

Consider the question “What is DeFi (decentralised finance)? What are the implications levying high tax on the cryptocurrencies?”


Systemic reforms are by no means easy, but they are critical as an amplifier of the successes that India has already accrued in the field and as an accelerator of India’s advancement in the sphere of crypto finance and blockchain social policymaking.

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Blockchain Technology: Prospects and Challenges

What are Virtual Digital Assets?


From UPSC perspective, the following things are important :

Prelims level : Virtual Digital Assets

Mains level : Taxing crypto assets

Recently, The Central Board of Direct Taxes (CBDT) issued detailed guidelines on the Tax Deducted at Source (TDS) rule for Virtual Digital Assets (VDAs) such as cryptocurrencies .

What are Virtual Digital Assets?

  • To define the term “virtual digital asset”, a new clause (47A) is proposed to be inserted into section 2 of the Act.
  • A virtual digital asset is proposed to mean any information or code or number or token (not being Indian currency or any foreign currency):
  1. Generated through cryptographic means or otherwise
  2. Providing a digital representation of value that is exchanged with or without consideration with the promise or representation of having inherent value
  3. Functions as a store of value or a unit of account and includes its use in any financial transaction or investment, but not limited to, investment schemes
  4. Can be transferred, stored, or traded electronically.
  • Non-fungible token (NFT) and; any other token of similar nature are included in the definition.

Why tax them?

  • Popularity: Virtual digital assets have gained tremendous popularity in recent times and the volumes of trading in such digital assets have increased substantially.
  • Growing market: Further, a market is emerging where payment for the transfer of a virtual digital asset can be made through another such asset.
  • Increased transactions: There has been a phenomenal rise in such transactions and the magnitude and frequency of these transactions have made it imperative to provide for a specific tax regime.
  • Prevalence of gifting: The gifting of virtual digital assets is also a popular mode of exchange.

Key takeaways from the FM’s speech

  • The bill provides for the definition of virtual digital assets which is wide enough to cover emerging digital assets including NFT, assets in metaverse, cryptocurrencies, etc.
  • This recognition of digital assets under income tax is NOT akin to granting legal status.


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Blockchain Technology: Prospects and Challenges

What are Non-Fungible Tokens (NFTs)?


From UPSC perspective, the following things are important :

Prelims level : Non-Fungible Tokens

Mains level : Challenges associated to Cryptocurrency

A French luxury fashion brand is suing American digital artist who created a series of NFTs (Non-Fungible Tokens), a rapidly growing part of the cryptoworld.

Non-Fungible Tokens

  • An NFT is a unique, irreplaceable token that can be used to prove ownership of digital assets such as music, artwork, even tweets and memes.
  • The term ‘non-fungible’ simply means that each token is different as opposed to a fungible currency such as money (a ten-rupee note can be exchanged for another and so on).
  • Cryptocurrencies such as Bitcoin and Ethereum are also fungible, which means that one Bitcoin can be exchanged for another.
  • But an NFT cannot be exchanged for another NFT because the two are different and therefore unique.
  • Each token has a different value, depending on which asset it represents.

How does NFT transaction take place?

  • NFT transactions are recorded on blockchains, which is a digital public ledger, with most NFTs being a part of the Ethereum blockchain.
  • NFTs became popular in 2021, when they were beginning to be seen by artists as a convenient way to monetize their work.

Why are they in high demand?

  • One of the other attractions is that NFTs are a part of a new kind of financial system called decentralized finance (DeFi), which does away with the involvement of institutions such as banks.
  • For this reason, decentralized finance is seen as a more democratic financial system because it makes access to capital easier for lay people by essentially eliminating the role of banks and other associated institutions.
  • Even so, because NFTs operate in a decentralized system, any person can sell a digital asset as one.
  • This can sometimes create problems. For instance, if you were to sell someone else’s artwork as an NFT, you could essentially be infringing on a copyright.


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Blockchain Technology: Prospects and Challenges

Web 3.0: A vision for the future


From UPSC perspective, the following things are important :

Prelims level : Web3

Mains level : Web and Blockchain technology

The concept of Web3, also called Web 3.0, used to describe a potential next phase of the internet, created quite a buzz in 2021.

What is Web3?

  • The model, a decentralized internet to be run on blockchain technology, would be different from the versions in use, Web 1.0 and Web 2.0.
  • In web3, users will have ownership stakes in platforms and applications unlike now where tech giants control the platforms.

Previous versions of Web

To understand web3, we should start with Web 1.0 and Web 2.0.

[1] Web 1

  • Web 1.0 is the world wide web or the internet that was invented in 1989. It became popular from 1993.
  • The internet in the Web 1.0 days was mostly static web pages where users would go to a website and then read and interact with the static information.
  • Even though there were e-commerce websites in the initial days it was still a closed environment and the users themselves could not create any content or post reviews on the internet.
  • Web 1.0 lasted until 1999.

[2] Web 2

  • Web 2.0 started in some form in the late 1990s itself though 2004 was when most of its features were fully available. It is still the age of Web 2.0 now.
  • The differentiating characteristic of Web 2.0 compared to Web 1.0 is that users can create content.
  • They can interact and contribute in the form of comments, registering likes, sharing and uploading their photos or videos and perform other such activities.
  • Primarily, a social media kind of interaction is the differentiating trait of Web 2.0.

What are some of the concerns?

  • In Web 2.0, most of the data in the internet and the internet traffic are owned or handled by very few behemoth companies ex. Google.
  • This has created issues related to data privacy, data security and abuse of such data.
  • There is a sense of disappointment that the original purpose of the internet has been distorted.
  • It is in this context that the buzz around Web3 is significant.

Dawn of Web3

  • Gavin Wood, founder of Ethereum, a block chain technology company, used the term Web3 first in 2014 and in the past few years many others have added to the idea of Web3.
  • In 2021, owing to the popularity of crypto-currency, more discussions happened on Web3.

How will Web3 address the problems of data monopoly?

Web3 will deliver decentralized and fair internet where users control their own data.

  • Currently if a seller has to make a business to the buyer, both the buyer and seller need to be registered on a “shop” or “platform” like Amazon or Ebay or any such e-commerce portal.
  • What this “platform” currently does is that it authenticates that the buyer and seller are genuine parties for the transaction.
  • Web3 would try to remove the role of the “platform”.
  • For the buyer to be authenticated, the usual proofs aided by block chain technology will be used. The same goes for the seller.

How is blockchain technology used here?

  • With block chain, the time and place of the transaction are recorded permanently.
  • Thus, Web3 enables peer to peer (seller to buyer) transaction by eliminating the role of the intermediary. This concept can be extended to other transactions also.
  • Consider a social media application where you want to share pictures with your followers.
  • It could be a broadcast operation from you aided by blockchain and you don’t need social media accounts for all the participants to be able to perform this.

Another key feature: Decentralized Autonomous Organization

  • The key concepts in Web3 seen so far are peer to peer transaction and block chain.
  • The spirit of Web3 is Decentralized Autonomous Organization (DAO).
  • DAO is all about the business rules and governing rules in any transaction are transparently available for anyone to see and software will be written conforming to these rules.
  • Crypto-currency and block chain are technologies that follow the DAO principle.
  • With DAO, there is no need for a central authority to authenticate or validate.

Will it take off?

  • We don’t know yet if Web3 will become the dominant mode of handling the internet but the questions it raises are relevant.
  • Web3 is in its very initial days and there is no consensus if it will take off like Web 1.0 or Web 2.0 did.
  • There is much skepticism from top tech brains in the industry and the academic community that Web3 does not solve the problems it purports to solve.


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Blockchain Technology: Prospects and Challenges

Carbon Footprints of Cryptocurrencies


From UPSC perspective, the following things are important :

Prelims level : Cryptocurrencies

Mains level : Carbon footprint of cryptocurrencies

Bitcoin prices are rising these days and so will be its mining. As cryptocurrency will become mainstream, its carbon footprint cannot be ignored.

What are Cryptocurrencies?


Global crypto market

  • In 2019, the global cryptocurrency market was approximately $793 million.
  • It’s now expected to reach nearly $5.2 billion by 2026, according to a report by the market research organization Facts and Factors.
  • In just one year—between July 2020 and June 2021—the global adoption of cryptocurrency surged by more than 880 percent.

Carbon footprints of Bitcoins

  • Increasing popularity of cryptocurrency has environmentalists on edge, as the digital “mining” of it creates a massive carbon footprint due to the staggering amount of energy it requires.
  • A/c to the Bitcoin Energy Consumption Index, the carbon footprint of Bitcoin is equivalent to that of New Zealand.
  • Both emit nearly 37 megatons of carbon dioxide into the atmosphere every year.

What is Mining?

  • Mining is a process in which computational puzzles are solved in order to verify transactions between users, which are then added to the blockchain.
  • In simpler terms, the works are created, or “minted,” through a process called proof-of-work (PoW), which establishes its unique identity.

How do cryptocurrencies create such a footprint?

  • Unlike mainstream traditional currencies, bitcoin is virtual and not made from paper or plastic, or even metal.
  • Bitcoin is virtual but power-hungry as it is created using high-powered computers around the globe.
  • Bitcoin is created when high-powered computers compete against other machines to solve complex mathematical puzzles.
  • This is an energy-intensive process that often relies on fossil fuels, particularly coal, the dirtiest of them all.


  • What this means is that, unlike traditional currency or gold, Bitcoin is not solely a settlement layer, not solely a store of value, and not solely a medium of exchange.
  • This makes Bitcoin’s relative energy consumption productive in comparison to comparative sectors, given its robust potential uses.
  • The promise of such an endeavor offers hope for a more sustainable cryptocurrency future.
  • Whether this will make much difference to the climate crisis in light of government and industrial inaction remains to be seen.

Back2Basics: Bitcoin Energy Consumption Index


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Blockchain Technology: Prospects and Challenges

Understanding IC15, India’s first Crypto Index


From UPSC perspective, the following things are important :

Prelims level : IC15 Crypto Index

Mains level : Cryptocurrencies market in India

Superapp CryptoWire recently launched India’s first cryptocurrency index, IC15, which will measure the performance of the 15 most widely traded cryptocurrencies listed on leading crypto exchanges by market capitalization.

What is IC15?

  • CryptoWire constituted an Index Committee of domain experts, industry practitioners, and academicians that will select cryptocurrencies from the top 400 coins in terms of market capitalization.
  • The eligible cryptocurrency should have traded on at least 90% of the days during the review period and be among the 100 most liquid cryptocurrencies in terms of trading value.
  • Also, the cryptocurrency should be in the top 50 in terms of the circulating market capitalization.
  • The committee will then select the top 15 cryptocurrencies. The index will be reviewed quarterly.

What is its significance?

  • IC15 can be replicated for creating index-linked products such as index funds or exchange-traded funds (ETFs).
  • Usually, the performance of a mutual fund scheme is assessed with reference to a benchmark, which could be a total return index of the Nifty or the Sensex.
  • IC15 is the first index in India that can act as a benchmark of the underlying cryptocurrency market and the performance benchmark for fund managers.
  • Moreover, robo-advisors, which provide financial advice with moderate to minimal human intervention, can use this index to create investment products at lower costs.

How  does  IC15  correlate  with other market indicators?

  • IC15’s base value as on 1 April 2018 was 10,000.
  • It would mean that the index has gained 615% in absolute terms to 71,475.48 till 31 December 2021.

Can  index-based  crypto investment reduce risks?

  • Index investing can be an effective way to diversify against risks as a fund invests in a basket of assets against a few limited coins.
  • However, index-based investing may not fully remove risks associated with investing in crypto assets.
  • Case in point: IC15 saw a 50% plunge in 2018, whereas other asset classes have seen a maximum drop in the range of 3-4%.
  • Further, bitcoin and ethereum have a combined weightage of 77% in the index, making it highly vulnerable to any volatility in these two coins.

Can crypto funds be launched in India?

  • SEBI has recently asked mutual fund houses not to launch crypto-based funds until the Centre comes out with clear regulations.
  • This means asset management companies for now won’t be able to launch crypto funds based on IC15.
  • However, in the absence of any regulations, crypto platforms can offer products based on the index.
  • Global crypto investment platform Mudrex last year launched Coin Sets—crypto funds based on themes such as decentralized finance or market cap.


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Blockchain Technology: Prospects and Challenges

What are Blockchain Funds?


From UPSC perspective, the following things are important :

Prelims level : Mutual funds, Blockchain funds

Mains level : Not Much

The Securities and Exchange Board of India (SEBI) has ruled that Indian mutual funds (MFs) cannot invest in crypto-related products until government regulations on are clear.

What are Blockchain Funds?

  • Blockchain is a digital ledger system that facilitates the process of recording transactions and tracking assets in a network.
  • It is possible to have blockchain without crypto, but in practice the two are highly interlinked.
  • Cryptocurrency tends to power the resources needed for a public blockchain network.
  • Unlike specific crypto-based investments, blockchain funds invest in multiple companies that are driving sustainable earnings from blockchain businesses.
  • Some key companies in this ecosystem are US-based Coinbase Global Inc and Advanced Micro Devices Inc, and Japan’s GMO internet Inc.

Why has SEBI blocked Blockchain funds?

  • Absence of regulations: SEBI concerns stem from unclear regulations around cryptocurrencies in India.
  • Unclear future: While investing, trading and holding crypto assets are allowed in India as of now, the laws are still not clear as to how they are regulated and taxed.
  • Possible ban: There is a possibility that the government may ban trading in crypto altogether or come up with stringent thresholds for investors to delve into this new asset.
  • Taxing the gains: For taxation purposes, short-term capital gains from individual crypto investing are taxed at personal taxation rates, however, there are no clear guidelines for fund investing.

Are blockchain funds good investments?

  • The technology is creating value by revolutionizing the way assets and digital records are managed and transferred.
  • Many companies, particularly in financial services, are investing millions of dollars in researching and building Blockchain infrastructure.
  • Although the technology is still in the nascent phase in India, its potential across the board is huge.

Back2Basics: Mutual Funds

  • A mutual fund is a company that pools money from many investors and invests the money in securities such as stocks, bonds, and short-term debt.
  • The combined holdings of the mutual fund are known as its portfolio. Investors buy shares in mutual funds.
  • Each share represents an investor’s part ownership in the fund and the income it generates.

Mutual funds are a popular choice among investors because they generally offer the following features:

  • Professional Management. The fund managers do the research for you. They select the securities and monitor the performance.
  • Diversification or “Don’t put all your eggs in one basket.” Mutual funds typically invest in a range of companies and industries. This helps to lower your risk if one company fails.
  • Affordability. Most mutual funds set a relatively low dollar amount for initial investment and subsequent purchases.
  • Liquidity. Mutual fund investors can easily redeem their shares at any time, for the current net asset value (NAV) plus any redemption fees.

Risks with MFs

  • With mutual funds, one may lose some or all of the money invested because the securities held by a fund can go down in value.
  • Dividends or interest payments may also change as market conditions change.
  • The more volatile the fund, the higher the investment risk.


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Blockchain Technology: Prospects and Challenges

Risks involved in investment in cryptocurrencies


From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 3- Changing patterns in saving and investment


We are witnessing the change where the cult of savers has changed into investors. They are looking for a good return and willing to take the risk.

Changing the behaviour of the savers

  • There is a new wave of savings and investments in the country that is evolving quite fast.
  • Crypto exchanges assure you that they are safe.
  • But it is the exchange that is safe, not the value of the coin, which will be driven by the market.
  • The equity boom is on, and all the unicorns have delivered excellent results.
  • That’s why bank deposits are no longer on our plates.
  • Banks discouraging deposits: Interestingly, banks today are discouraging deposits with low rates as this is the only way they can manage their balance sheets.
  • Low-interest rate: There are few deployment avenues and paying 5 per cent interest to savers and investing the deposits at 3.35 per cent in the reverse repo auction is a sub-optimal game.

How safe is investment in cryptocurrencies?

  • From equities, there has been a swift shift to cryptos, which is still a grey area.
  • The regulators/government are wondering what to do. The issue will be discussed in the winter session of Parliament.
  • But investments have been made and there is no stopping this global wave.
  • Currency with no underlying asset: Making money on a currency that has no underlying asset like a metal or other currency and is traded on faith is unique; especially Bitcoin, whose originator is not known by face but by just a name.

Gaming as a skill

  • There is another door to a new kind of gaming where you make money by making teams and following the matches.
  • The law was first silent, and then confused.
  • But it finally accepted gaming as a skill.
  • Logically, soon we should be able to bet on matches too, if all this is in order.


We are witnessing a change in the pattern of holding onto money, where savings get transformed to investment and risk appetite changes from conservative to aggressive. Will this change? Probably not, in the near future, as long as conventional deposits continue to give inferior returns.

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Blockchain Technology: Prospects and Challenges

Is crypto mania more a symptom than a cause?


From UPSC perspective, the following things are important :

Prelims level : Blockchain technology

Mains level : Paper 3- Approach towards cryptocurrencies


The draft legislation on crypto currency being introduced in Parliament and the stance of the RBI suggest that consideration is being given to banning crypto currencies in India.

What fascination with crypto reveals about our society?

  • It is about faith in that value is largely a matter of belief.
  • It is about politics because money is always about the allocation of power.
  • The money itself may not be material, but it is still embedded in a materiality.
  • The fact that money is subject to politics is actually the advantage of money.
  • It allows a modicum of collective control over our future, and allows distributive questions to be posed.
  • It is mania because the alchemy of creating something out of nothing is always deeply alluring.
  • Cheap money: The global economy is awash with cheap money.
  • Seeking return: In an Indian context small savers are desperate for return.
  • In this context it is easy for the powerful to misallocate money and the small saver to express desperation by speculation.


  • Faced with the inflation of the 1970s, thinkers like Friedrich Hayek theorised about reasserting the dominance of private currencies, protected from the state.
  • Crypto currencies are a fascinating technological innovation.
  • Part of their initial attraction was that they promised a new governance order. 
  • It is at the confluence of faith, politics, and psychological mania.
  • Solving the problem of trust: This project crucially depended on solving the problem of “trust” on which every currency depends.
  • Crypto seemed to solve that problem, with its decentralised architecture and community and self-verification protocols.

How cryptocurrency poses challenges to the state?

  • No state was going to let go of its power to assert control over the monetary system.
  • Significance of fiat money: The sustenance of state-sponsored fiat money is one of the great achievements of modern state formation and the foundation of its power and legitimacy.
  • Cryptocurrency requires material infrastructure: There was a delusion, as if crypto is conjured out of thin air: It actually requires substantial material infrastructure, which a state could always control.
  • States can shut down mining as China has done.

Way forward

  • We allow people to invest in all kinds of things. Why ban this, especially now that so many investors are in it?
  • Analyse the risk to the financial system: The answer to this question depends on how much risk the existence of crypto assets pose to the stability of the rest of the financial system.
  • Insulate financial system: One answer is if you can insulate the financial system from the gyrations of crypto markets there are few systemic risks.
  • This is why it was a good idea of the RBI to prohibit the entanglement of financial institutions with this market.
  • Instead of just focussing on issues of fraud, money laundering, and private risks, the RBI’s case would be strengthened if it spelled out the systemic risks that crypto might pose to the stability of the real economy.
  • Avoid ban with exception scenario: For political economy reasons, the RBI should avoid a scenario where it bans but then carves out exceptions.
  • Ensuring that trade does not go offshore: The second thing is that if it somehow allows Indians to invest then it has to ensure that trade does not go offshore. 
  • Not fully banning and allowing it offshore will be the worst of both worlds.

Challenges in insulating the crypto market

  • In practice the insulation of crypto markets will be difficult to achieve.
  • Political economy: The first reason is political economy. Once you have a large number of investors, and some influential ones, they will be a vested interest in their own right, potentially demanding the socialisation or mitigation of losses.
  • Impact of volume: The second reason is that it is difficult to pretend that a major new class of assets, especially if volumes grow, does not have systemic effects on the rest of the economy.

Consider the question “What are the risks and advantages provided by the cryptocurrencies? Suggest the approach India should adopt in dealing with cryptocurrencies.”


As the RBI makes the case for banning crypto, we also need to ask, why it is alluring in the first place. What does this mania reveal about our politics and economics?

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Blockchain Technology: Prospects and Challenges

Cryptocurrencies regulation across the World


From UPSC perspective, the following things are important :

Prelims level : Cryptocurrencies

Mains level : Need for Cryptocurrencies regulation

The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 was listed for introduction in Parliament’s Winter Session.

About the Bill

  • The bill aims to create a facilitative framework for the creation of the official digital currency to be issued by the Reserve Bank of India”.
  • It seeks to prohibit all private cryptocurrencies in India, however, it allows for certain exceptions to promote the underlying technology of cryptocurrency and its uses.

How are cryptocurrencies regulated in countries around the world?

The stance of countries and regulators has ranged from:

  1. A total ban on these financial assets Ex. China
  2. Allowing them to operate with some regulations
  3. Allowing virtual currency trading in the absence of any guidelines Ex. El Salvador
  • Governments and regulators remain divided on how to categorize it as a currency or asset — and how to control it from an operational point of view.
  • The evolution of the policy and regulatory response has been uncharacteristically discordant, with no apparent coordination in the responses of countries.

Among the countries that haven’t issued detailed regulations, there are those that have recognized and defined these currencies.


  • It defines virtual currency  under its Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations, as:

(a) a digital representation of value that can be used for payment or investment purposes that is not a fiat currency and that can be readily exchanged for funds or for another virtual currency that can be readily exchanged for funds; or

(b) a private key of a cryptographic system that enables a person or entity to have access to a digital representation of value referred to in paragraph (a).

  • The Canada Revenue Authority (CRA) generally treats cryptocurrency as a commodity for purposes of the country’s Income Tax Act.


  • Israel in its Supervision of Financial Services Law includes virtual currencies in the definition of financial assets.
  • The Israeli securities regulator has ruled that cryptocurrency is a security subject, while the Israel Tax Authority defines cryptocurrency as an asset and demands 25% on capital gains.


  • In Germany, the Financial Supervisory Authority qualifies virtual currencies as “units of account” and therefore, “financial instruments”.
  • It considers Bitcoin to be a crypto token given that it does not fulfill typical functions of a currency.
  • However, citizens and legal entities can buy or trade crypto assets as long as they do it through exchanges and custodians licensed with the German Federal Financial Supervisory Authority.


  • In the UK, Her Majesty’s Revenue & Customs, do not consider crypto assets to be currency or money.
  • It further notes that cryptocurrencies have a unique identity and cannot, therefore, be directly compared to any other form of investment activity or payment mechanism.


  • In US different states have different definitions and regulations for cryptocurrencies.
  • While the federal government does not recognize cryptocurrencies as legal tender, definitions issued by the states recognize the decentralized nature of virtual currencies.


  • In Thailand, digital asset businesses are required to apply for a license, monitor for unfair trading practices, and are considered “financial institutions” for anti-money laundering purposes.


  • While most of these countries do not recognize cryptocurrencies as legal tender, they do recognize the value these digital units represent.
  • Almost all countries consider their functions as either a medium of exchange, unit of account, or a store of value (any asset that would normally retain purchasing power into the future).
  • Like India, several other countries have moved to launch a digital currency backed by their central bank.


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Blockchain Technology: Prospects and Challenges



From UPSC perspective, the following things are important :

Prelims level : Cryptocurrencies and Legal Tender Currency

Mains level : Need for Cryptocurrencies regulation

With cryptocurrencies such as Bitcoin gaining popularity among citizens, the Centre has been compelled to take a stance on the legal status of cryptocurrencies.


  • The Union Government is said to be considering a proposal to tax cryptocurrency transactions in the country.
  • The move would bring cryptocurrency trading, which has till date happened outside the ambit of the law, into the formal economy.

Defying RBI ban

  • RBI has been vehemently opposed to the idea of legalizing cryptocurrencies.
  • It had banned financial institutions such as banks from facilitating transactions involving cryptocurrencies back in 2018.
  • The RBI’s order was overturned by the Supreme Court in 2020, and this led to a tremendous surge in cryptocurrency transactions through exchanges.

Why did RBI propose a ban?

  • Financial stability: The RBI has characterized private cryptocurrencies as a threat to financial stability.
  • Threat to the sovereignty of Rupee: It perceives cryptocurrencies rise as a threat to the sovereignty of the rupee.
  • Beyond regulatory scope: The widespread acceptance of cryptocurrencies could interfere with the ability of the RBI to conduct monetary policy effectively.
  • Digital currency in the pipeline: It should be noted that RBI and other central banks are also looking to come up with digital versions of their own currencies.
  • Competition of currencies: The rupee or central bank digital currencies may not be able to outcompete cryptocurrencies just because they are digital.

Legislative opinion on Cryptocurrencies

  • Not in favour of ban: This week, a Parliamentary Standing Committee recommended that cryptocurrencies be regulated rather than banned.
  • Making a legal framework: The Government is also expected to table a bill that clarifies its position on cryptocurrencies in Parliament next year.
  • Taxing cryptocurrencies: There is a proposal to classify cryptocurrency exchanges as e-commerce platforms and tax them under the GST framework comes.

Why has the Government chosen to regulate rather than ban cryptocurrencies?

  • Popularity amongst Public: The growing popularity of cryptocurrencies among citizens may have played a role in the Government opting for regulation over an outright ban.
  • Lack of evident threat: There is no clear evidence of the misuse of cryptocurrencies and their risks.
  • Boosting with policy: The Union govt may also not want to kill the nascent cryptocurrency industry which many believe can be a hub for financial innovation.
  • Revenue generation: Fiscal revenues can be adversely impacted by the increased tax evasion opportunities that crypto-currencies can facilitate.
  • Capitalizing the market: The govt wants to capitalise on the recent surge in the usage of cryptocurrencies to tax them and shore up its revenues.
  • Financial innovation: Blockchain technology has multiple uses beyond just facilitating cryptocurrency transactions.

Issues with the ban

  • Brain-Drain: Ban of cryptocurrencies is most likely to result in an exodus of both talent and business from India, similar to what happened after the RBI’s 2018 ban.
  • Capital inflows will be restricted: If cryptos begin to get mined onshore, they will induce capital inflows.
  • Killing financial innovation: A ban will deprive India, its entrepreneurs and citizens of a transformative technology that is being rapidly adopted across the world.

Other generic concerns:

  • Safety (cyber-attacks and fraud)
  • Financial integrity (money laundering and evasion of capital controls)
  • Energy usage (outsized energy needs to mine cryptos)

Way forward

  • Thus it can be inferred that cryptocurrency is better classified as an asset rather than as a currency, in order to gain acceptance and avoid a ban.


  • There is no doubt that the acceptance of cryptocurrencies by the Government is likely to be limited.
  • While cryptocurrencies may be accepted as speculative assets, it is highly unlikely that they will be accepted as full-fledged currencies competing against the rupee.


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Blockchain Technology: Prospects and Challenges

Taproot upgrade in Bitcoins


From UPSC perspective, the following things are important :

Prelims level : Taproot upgrade in Bitcoins

Mains level : Cryptocurrencies regulation in India

Bitcoin went through a major upgrade that enables its blockchain to execute more complex transactions, potentially widening the virtual currency’s use cases and making it a little more competitive with Ethereum for processing smart contracts.

What is the new upgrade?

  • The enhancement, called Taproot, is the most significant change to the bitcoin protocol since the SegWit (Segregated Witness) block capacity change in 2017.
  • SegWit effectively increased the number of transactions that could fit into a block by pulling data on signatures from bitcoin transactions.
  • Smart contracts are self-executing transactions whose results depend on pre-programmed inputs.

What is Taproot?

  • The Taproot upgrade consists of three separate upgrade proposals.
  • However, at its core, the upgrade introduces a new digital signature scheme called “Schnorr” that will help bitcoin transactions become more efficient and more private.
  • Schnorr can also be leveraged to let bitcoin users execute more complex smart contracts.

When was Taproot officially activated?

  • Taproot was officially activated on block 709,632.
  • Blockchains settle transactions in batches or blocks.
  • Each block can contain only a certain number of transactions.

What is its impact on Bitcoin?

  • The biggest impact would be the bitcoin network’s ability to process more smart contracts, similar to what Ethereum does.
  • Bitcoin has historically been much more limited in processing smart contracts compared with Ethereum.
  • Taproot increases privacy by obscuring what type of transaction is being executed.

What are the other enhancements?

  • The Schnorr signatures can make more complex transactions on the bitcoin protocol, such as those from wallets that require multiple signatures, look like just any other transaction.
  • This makes transactions more private and more secure.
  • Bitcoin transactions will also become more data-efficient, optimizing block capacity and leading to lower transaction fees.

What does Taproot mean for investors?

  • Large-scale upgrades have paved the way for the next phase of innovation in the bitcoin network.
  • The last major upgrade in 2017 helped launch the Lightning Network, which facilitated much faster and cheaper bitcoin payments than before.
  • Taproot to lead to a similar wave of innovation in bitcoin centered around smart contracts.

Also read:


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Blockchain Technology: Prospects and Challenges

What is a Bitcoin Hardware Wallet and how it works?


From UPSC perspective, the following things are important :

Prelims level : Cryptocurrencies

Mains level : Issues with Cryptocurrencies

Last week, Twitter CEO announced his payments firm Square would soon build a hardware wallet to store bitcoin.

Bitcoin Hardware Wallet

  • The wallet will be a type of plug-in device, much like a USB pen drive that stores, manages and secures a user’s crypto assets.
  • Each digital asset is linked to a cryptographic password called a ‘private key’ to allow users to access it.
  • This key safeguards cryptocurrencies from theft and unauthorized access.
  • The asset owner, with the help of a secure hardware wallet, can access the private key to buy and sell crypto assets from anywhere.
  • Most hardware wallets allow users to manage multiple accounts; some even allow users to connect to their Google or Facebook accounts.
  • Popular hardware wallets include Trezor, Ledger, KeepKey and Prokey.

How is it different from a software wallet?

  • Cryptocurrency keys can be stored in two kinds of wallets – software and hardware.
  • Software wallets are like smartphone apps that digitally store private keys.
  • Most software wallets don’t charge users to store private keys but may collect a commission for trading via the app.
  • These wallets can be vulnerable to malware.
  • Hardware wallets and physical devices act like cold storage for confidential keys. The passwords are protected by a PIN, making it difficult for hackers to extract private keys as the information is not exposed to the Internet.

The upsides of a hardware wallet

  • Hardware wallets are said to be convenient as they can be connected to trading exchanges to complete transactions.
  • Hardware wallets are often stored in a protected microcontroller and cannot be transferred out of the device, making them secure.
  • Their isolation from the Internet also mitigates the risk of the assets being compromised. Moreover, it does not rely on any third-party app.


  • Since the wallet is in physical form, the device could be stolen or destroyed.
  • They could be used by malicious actors to steal confidential data.
  • The device can also be expensive as compared to software wallets.
  • Some hardware wallets can also have complex features, making it difficult for first-timers to understand.

Answer this PYQ in the comment box:

Q.With reference to “Blockchain Technology”, consider the following statements:

  1. It is a public ledger that everyone can inspect but which no single user controls.
  2. The structure and design of block chain is such that all the data in it are about crypto currency only.
  3. Applications that depend on basic features of blockchain can be developed without anybody’s permission.

Which of the statement given above is/are correct?

(a) 1 only

(b) 2 only

(b) 1 and 2 only

(d) 1 and 3

Back2Basics: Cryptocurrencies

  • A cryptocurrency is a digital asset designed to work as a medium of exchange wherein individual coin ownership records are stored in a ledger existing in a form of a computerized database.
  • It uses strong cryptography to secure transaction records, control the creation of additional coins, and verify the transfer of coin ownership.
  • It typically does not exist in physical form (like paper money) and is typically not issued by a central authority.
  • Cryptocurrencies typically use decentralized control as opposed to centralized digital currency and central banking systems.

Blockchain Technology: Prospects and Challenges

Why is China targeting Cryptocurrencies?


From UPSC perspective, the following things are important :

Prelims level : Cryptocurrencies

Mains level : Issues with Cryptocurrencies

China’s crackdown against cryptocurrencies, which are those that aren’t sanctioned by a centralized authority and are secured by cryptography, is said to have a lot to do with the crashing of the value of cryptocurrencies.


  • The price of the world’s most prominent cryptocurrency Bitcoin has more than halved in the last two months after hitting a peak in mid-April.
  • The second-most valuable cryptocurrency, Ether, has seen a similar fall from its peak last month.

What is Cryptocurrency?

  • A cryptocurrency is a form of digital asset based on a network that is distributed across a large number of computers.
  • This decentralized structure allows them to exist outside the control of governments and central authorities.
  • The word “cryptocurrency” is derived from the encryption techniques which are used to secure the network.
  • Blockchains, which are organizational methods for ensuring the integrity of transactional data, are an essential component of many cryptocurrencies.
  • Many experts believe that blockchain and related technology will disrupt many industries, including finance and law.
  • Cryptocurrencies face criticism for a number of reasons, including their use for illegal activities, exchange rate volatility, and vulnerabilities of the infrastructure underlying them. However, they also have been praised for their portability, divisibility, inflation resistance, and transparency.

What has China done?

  • In recent weeks, China has reportedly cracked down on crypto mining operations.
  • The country has over the years accounted for a large percentage of the total crypto mining activity that takes place.
  • In purpose, Bitcoin miners play a similar role to gold miners — they bring new Bitcoins into circulation.
  • They get these as a reward for validating transactions, which require the successful computation of a mathematical puzzle.
  • And these computations have become ever-increasingly complex, and therefore energy-intensive in recent years. Huge mining operations are now inevitable if one is to mine Bitcoins.

Why is Crypto mining booming in China?

  • Access to cheap electricity has made mining lucrative in China.
  • According to the Cambridge Bitcoin Electricity Consumption Index, China accounted for nearly two-thirds of the total computational power last year.

For an ‘unregulated’ market

  • Actually, there is little change in the policy as far as China is concerned. It first imposed restrictions on cryptocurrencies way back in 2013.
  • It then barred financial institutions from handling Bitcoin.
  • Four years later, it barred what are called initial coin offerings, under which firms raise money by selling their own new cryptocurrencies.
  • This is largely an unregulated market.

What does China want?

  • An inter-ministerial committee report in India two years ago noted that in 2017, the government of China also banned trading between RMB (China’s currency renminbi) and cryptocurrencies.
  • Before the ban, RMB made up 90% of Bitcoin trades worldwide.
  • The fact that cryptocurrencies bypass official institutions has been a reason for unease in many governments.
  • Not just that. The anonymity that it offers aids in the flourishing of dark trades online.
  • While many countries have opted to regulate the world of cryptocurrencies, China has taken the strictest of measures over the years.
  • According to observers, the latest set of measures are to strengthen its monetary hold and also project its new official digital currency.

For a digital Yuan

  • China launched tests for a digital yuan in March.
  • Its aim is to allow Beijing to conduct transactions in its own currency around the world, reducing dependency on the dollar which remains dominant internationally.

Also read:

Legalizing Bitcoin in El Salvador and takeaways for India

Blockchain Technology: Prospects and Challenges

Embracing cryptocurrency


From UPSC perspective, the following things are important :

Prelims level : What are cryptocurrencies

Mains level : Paper 3- Regulating cryptocurrencies

As India struggles to come up with an appropriate approach towards cryptocurrencies, the growing trend of the adoption of cryptocurrencies across the world offers a lesson.

Rising global trend of embracing cryptocurrencies

  • El Salvador became the first country in the world to adopt bitcoin as legal tender.
  • The U.K. has classified cryptocurrency as property.
  • The U.K. has sought to regulate the functioning of crypto-businesses while still imposing some restrictions to protect the interests of investors.
  • On the other hand, while there is no exact legal classification of cryptocurrency in Singapore, there is now a legal framework for cryptocurrency trading.
  • In the U.S., the open approach taken by the authorities has resulted in the trade in cryptocurrency being both taxed and appropriately regulated.

India’s approach

  • Between 2013 and 2018, the government’s response to the rise of virtual currencies was cautionary, alerting users to the potential risks posed by cryptocurrency transactions.
  • Instead of developing a regulatory framework to address these issues, the Reserve Bank of India (RBI), in April 2018, effectively imposed a ban on cryptocurrency trading.
  • This ban was overturned by the Supreme Court in 2020.
  • The court reasoned that there were alternative regulatory measures short of an outright ban through which the RBI could have achieved its objective of curbing the risks associated with cryptocurrency trading.
  • India’s next move lies in the draft Cryptocurrency and Regulation of Official Digital Currency Bill, 2021.
  • The draft Bill proposes to criminalise all private cryptocurrencies while also laying down the regulatory framework for an RBI-backed digital currency. 

What should be India’s approach?

  • The global regulatory attitude towards cryptocurrencies offers valuable insights into the alternative ways to achieve balanced regulation.
  •  In India, the absence of an existing legal classification of cryptocurrency should not be the impetus to prohibit its use.
  • The government should use this as an opportunity to allow private individuals the freedom to harness a powerful new technology with appropriate regulatory standards.

Consider the question “As India finds itself at a crossroads of prohibition and regulation in its tryst with cryptocurrencies, globally, the inclination towards permissive regulation recognises the freedom of choice given to people. In light of this, examine the advantages and concerns with the cryptocurrencies and suggest the approach India should adopt towards the cryptocurrencies.”


Regulations to avoid the pitfall and not the outright ban is the right way towards the cryptocurrencies.

Blockchain Technology: Prospects and Challenges

Legalizing Bitcoin in El Salvador and takeaways for India


From UPSC perspective, the following things are important :

Prelims level : Bitcoin

Mains level : Cryptocurrencies regulation in India

El Salvador, a small coastal country in Central America, on became the first in the world to make Bitcoin, a digital currency, legal.

Lessons for India

While there are many precedents El Salvador sets for a global debate on cryptocurrency, we explore what this means in the Indian context.

(1) Not a precedent for monetary policy

  • The development in El Salvador changes little in terms of Indian monetary calculations around cryptocurrencies.
  • The dynamic underpinning the whole move is that El Salvador has no monetary policy of its own and hence, no local currency to protect.
  • The country was officially ‘dollarized’ in 2001 and runs on the monetary policy of the US Federal Reserve.
  • The move is in part motivated by loose and expansionary Federal Reserve policy.

(2) Coexistence with USD

  • The dollar will continue to remain the dominant currency in the country and Bitcoin would exist side by side.
  • Indeed, some analysts have pointed out how bitcoinization might change nothing on the ground if “legal tender” is to be considered by its strict legal definition.
  • However, as a result of this development, El Salvador becomes a most interesting case study of how the dollar and bitcoin would coexist side by side, and how that would play out for Bitcoin adoption.

(3) Not merely currency but technology

  • The overall use of Bitcoin appears less motivated by its use as a currency and much more by the image and investment boost this could give the country towards innovation.
  • El Salvador believes that this move will be good for luring “technology, talent, and new ideas” into the country.
  • The move into Bitcoin ties in with larger efforts to revive a stalling economy and bring back growth into the country post-Covid.

(4) Potential shift in remittances

  • The impact Bitcoin has on these remittance inflows would be worth monitoring for India, which is home to the largest remittance market in the world.
  • Remittances make up close to 20% of El Salvador’s GDP with flows approximating $6 billion annually.
  • Many citizens lack a bank account and digital banking has low penetration.
  • In this scenario, there are multiple intermediaries in the remittance chain who take cuts of as high as 20%.

(5) Impact on money laundering

  • The implication of this move for money laundering is unclear at the moment.
  • Currently, El Salvador is not considered deficient under the FATF money laundering requirements.
  • However, with large scale cryptocurrency inflows and outflows, it would be expected that El Salvador would comply with the 2019 FATF guidance on Virtual Currencies.


  • The overall takeaway for India from the El Salvador case is not in the monetary sense at all.
  • This is the wealth that India has in spades and has barely protected with policy.
  • While deliberations continue in India on the monetary and financial regulations around cryptocurrency.
  • It is important that attention be paid to incentives for India’s developers working on key innovations in the space.

Back2Basics: Bitcoin

  • 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.
  • The cryptocurrency was invented in 2008 by an unknown person or group of people using the name Satoshi Nakamoto.
  • The currency began to use in 2009 when its implementation was released as open-source software.

Blockchain Technology: Prospects and Challenges

Explained: Cryptocurrency Market Crash


From UPSC perspective, the following things are important :

Prelims level : Cryptocurrency, Blockchain technology

Mains level : Acceptance of cryptocurrency

The cryptocurrency market saw a big correction with prices of major currencies, including Bitcoin, Ethereum, BNB, and others crashing as much as 30% within 24 hours.  This came in the backdrop of Chinese regulators announcing a crackdown on cryptocurrencies.

Try this question from our AWE initiative:

What is a cryptocurrency? What benefits and challenges do cryptocurrencies pose? (250 Words)

Crackdown on Crypto Market

  • China has barred financial institutions and payment companies from providing any services related to cryptocurrency transactions.
  • This means that banks and online payment channels must not offer clients any service involving cryptocurrencies, such as registration, trading, clearing, and settlement.
  • China had issued such a ban in 2017 as well, but compared with the previous ban, the new rules have expanded the scope of prohibited services, and surmise that “virtual currencies are not supported by any real value”.

Other reason behind this crash: The Tesla story

  • Tesla recently announced that it wouldn’t favor Bitcoin on ‘environmental’ concerns because Bitcoin mining requires electricity which is mostly generated using fossil fuels.
  • However, this seems to be motivated and raises a few questions like – didn’t the Tesla management already know about Bitcoin mining before diversifying into it?

What does this fall imply?

  • A crackdown by one of the world’s biggest economy notwithstanding, those in the ecosystem has termed this decline as a short-term correction.
  • A nearly 40% dip in the bitcoin price from its all-time high looks dramatic but is normal in many volatile markets, including crypto, especially after such a large rally.
  • Such corrections are mainly due to short-term traders taking profits.
  • Long-term value investors might call these lower prices a buying opportunity.

Back2Basics: Cryptocurrencies

  • A cryptocurrency is a digital asset designed to work as a medium of exchange wherein individual coin ownership records are stored in a ledger existing in a form of a computerized database.
  • It uses strong cryptography to secure transaction records, control the creation of additional coins, and verify the transfer of coin ownership.
  • It typically does not exist in physical form (like paper money) and is typically not issued by a central authority.
  • Cryptocurrencies typically use decentralized control as opposed to centralized digital currency and central banking systems.

Blockchain Technology: Prospects and Challenges

Exit window likely for crypto holders in proposed legislation on cryptocurrencies


From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 3- Banning cryptocurrency

Law to ban private cryptocurrencies

  • The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 aims to prohibit all private cryptocurrencies.
  • It lays the regulatory framework for the launch of an “official digital currency” was set to be introduced in Parliament during the Budget session, but was not taken up.
  • A high-powered inter-ministerial committee has also previously recommended the banning of all private cryptocurrencies.
  • In April 2018, the RBI banned banks and other regulated entities from supporting crypto transactions after digital currencies were used for frauds.
  • In March 2020, the Supreme Court struck down the RBI’s ban on crypto, terming its circular unconstitutional.
  • One of the SC’s reasons for overturning the ban is that cryptocurrencies are unregulated but not illegal in India.

Central bank-issued digital currency

  • The RBI had said central banks are not only exploring DLT (Distributed Ledger Technology) for its application in improving financial market infrastructure but also considering it as a potential technological solution in implementing central bank digital currency (CBDC).
  • DLT and blockchain have been explored extensively by the People’s Bank of China as a possible technology for launching CBDC.
  • Apart from CBDC, PBoC is supporting research on using blockchain for trade finance, especially after the support from the President of China for the blockchain technology, as an important breakthrough for innovations.

Blockchain Technology: Prospects and Challenges

Carbon footprint of Bitcoins


From UPSC perspective, the following things are important :

Prelims level : Bitcoins

Mains level : Feasiblity of Bitcoins as currency

At a time when investors around the world are scrambling to follow the newest financial trend, very few are bothered about the carbon footprint that the cryptocurrency is leaving behind.

If Bitcoin were a country, it would consume more electricity than Austria or Bangladesh!

Footprint of Bitcoins

  • T A recent study by Alex de Vries, a Dutch economist, has shown that Bitcoins leave behind a carbon footprint of 38.10 Mt a year.
  • The annual carbon footprint of Bitcoins is almost equivalent to that of Mumbai, or to put it to a global perspective, as high as the carbon footprint of Slovakia.
  • A recent study has shown that Bitcoins leave behind a carbon footprint of 38.10 Mt a year.
  • According to a study titled ‘CO2 Emissions from Fuel Combustion (Highlights) 2017’, Mumbai’s yearly carbon footprint stands at 32 Mt, while Bangalore’s is at 21.60 Mt.
  • Vries has been able to create a Bitcoin Energy Consumption Index, one of the first systematic attempts to estimate the energy use of the bitcoin network.

Relation between creating bitcoins and electricity required

  • Bitcoins are created by “mining” coins, for which high-tech computers are used for long hours to do complex calculations.
  • The more coins there are in the market, the longer it takes to “mine” a new one and in the process, more electricity is consumed.
  • As mining provides a solid source of revenue, people are willing to run power-hungry machines for hours to get a piece.
  • In 2017, the Bitcoin network consumed 30 terawatt-hours (TWh) of electricity a year.
  • As such, each bitcoin transaction roughly requires an average of 300kg of carbon dioxide – which is equivalent to the carbon footprint produced by 750,000 credit cards swiped.

Calculating the carbon footprint

  • The major problem with mining Bitcoin is not its massive energy-consumption nature; it is the fact that most of the mining facilities are located in regions that rely heavily on coal-based power.
  • Earlier, determining the carbon impact of the Bitcoin network was difficult as tracking down miners was never easy.
  • As per the estimates of De Vries, roughly 60% of the costs of bitcoin mining is the price of the electricity used.
  • The price of a Bitcoin stood at $42,000 and at this rate; miners would be earning around $15 billion annually.

Other impacts of Bitcoin mining

  • The effects of cryptocurrency mining often spill over to other parts of the economy.
  • With miners using high-tech computers for hours to formulate new blockchains, these machines do not last long.
  • Manufacturers of Bitcoin mining devices need a substantial number of chips to produce these machines and recently, during the Covid-19 crisis, the world had witnessed a shortage of these chips.
  • This shortage, now, in turn, started affecting the production of electric vehicles around the world.

What can be done to control the carbon footprint?

  • The Dutch economist asks policymakers to follow the path shown by Québec in Canada, where a moratorium on new mining operations has been imposed.
  • Although Bitcoin might be a decentralized currency, many aspects of the ecosystem surrounding it are not.
  • Large-scale miners can easily be targeted with higher electricity rates, moratoria, or, in the most extreme case, confiscation of the equipment used.
  • Governments can also ban cryptocurrencies from digital asset marketplaces as it will affect the prices of a digital currency.

India and the cryptocurrency

  • The country, at present, has around 75 lakh cryptocurrency investors who have together pooled over Rs 10,000 crore into Bitcoins and other such digital currencies.
  • The prices have surged by over 900%, courtesy of the worldwide boom – a single bitcoin that used to cost around Rs 4 lakh in 2020 now costs somewhere around Rs 41 lakh now.
  • FM Nirmala Sitharaman has said that the Centre will take a “calibrated approach” and leave a window open for experiments with blockchain technology.

Blockchain Technology: Prospects and Challenges

Regulate but do no ban Bitcoin


From UPSC perspective, the following things are important :

Prelims level : Blockchain

Mains level : Paper 3- Implications of banning blockchain technology

The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 seeks to ban cryptocurrencies. Banning cryptocurrencies would have several implications for India. This article deals with this issue.

Soaring value of Bitcoin

  • Recently, Tesla announced that it will soon accept cryptocurrency as legitimate payment for its cars.
  • Mastercard followed by announcing that it will incorporate ‘select cryptocurrencies’ on its global payment network.
  • BNY Mellon, incidentally the US’s oldest bank, announced holding and transferring digital currencies for asset management clients.
  • JP Morgan and Goldman Sachs announced executive positions to look at cryptocurrencies.
  • All of this resulted in a soaring value of Bitcoin, and its younger sibling, Ethereum.

India’s governments stand on cryptocurrencies

  • India’s government sought to ban cryptocurrency through a proposed legislation, the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021.
  • The Bill also provides to also set up a legal structure for an “official digital currency”.
  • The Bill promises to “allow for certain exceptions to promote the underlying technology of cryptocurrency (blockchain) and its uses.”
  • The way the technology is built, an ownerless, consensus-driven, distributed ledger like a blockchain needs cryptocurrency to grease its wheels.
  • India tried to ban cryptocurrency once before, in 2018, before it was reversed by the Supreme Court.

Implications of banning cryptocurrencies

  • The banning will kill innovation.
  • India has more than 30,000 blockchain innovators and practitioners.
  • These innovators will now be looking at moving out to friendlier regimes like the US, Switzerland, Singapore and Estonia.
  • International tech companies will freeze blockchain and crypto-exchange investments in India and the step will undermine India’s reputation as a technology hub.
  • India is the second-largest Bitcoin trading nation in Asia, and all those trades will move to overseas exchanges.
  • China has large crypto trading and mining operations, and an Indian ban on Bitcoin will leave that space open for it.

Consider the question “What is cryptocurrency? What would be the implications of banning it?”


No doubt, there are many problems with cryptocurrency—it is volatile, sucks energy, and is often abused by criminals. But the answer is not to ban it, but regulate it.


Blockchain Technology: Prospects and Challenges

Cryptocurrency and Regulation of Official Digital Currency Bill, 2021


From UPSC perspective, the following things are important :

Prelims level : Cryptocurrency, Blockchain technology

Mains level : Digital Currency

With the likely scenario of India’s government banning private cryptocurrencies, the Reserve Bank of India (RBI) is planning to introduce an official digital currency for the country.

What is the news?

  • An earlier government bill on cryptocurrency in 2019 reportedly sought to ban cryptocurrency and criminalise its possession in India. However, it was not introduced in Parliament.
  • The detailed text of the bill has not been released in the public domain so far.
  • The bill also says that there will be a regulation to help RBI create its own CBDC (central bank digital currency).

What are Cryptocurrencies?

  • A cryptocurrency is a digital asset designed to work as a medium of exchange wherein individual coin ownership records are stored in a ledger existing in a form of a computerized database.
  • It uses strong cryptography to secure transaction records, to control the creation of additional coins, and to verify the transfer of coin ownership.
  • It typically does not exist in physical form (like paper money) and is typically not issued by a central authority.
  • Cryptocurrencies typically use decentralized control as opposed to centralized digital currency and central banking systems.

Hues over the Bill

  • The past year has seen a surge in the number of cryptocurrency investors in India and in trading volumes.
  • Cryptocurrency exchanges such as CoinDCX and Coinswitch Kuber have also raised early-stage funding for their operations.
  • The bill may spark an end to the nascent cryptocurrency industry in the country.

What were the provisions of 2019 Bill?

Definition of cryptocurrencies:

  • The 2019 Bill defined cryptocurrency as any information, code, number or token, generated through cryptographic means or otherwise, which has a digital representation of value and has utility in business activity, or acts as a store of value or a unit of account.


  • The 2019 Bill bans the use of cryptocurrency as legal tender or currency.
  • It also prohibits mining, buying, holding, selling, dealing in, issuance, disposal or use of cryptocurrency.
  • Mining is an activity aimed at creating a cryptocurrency and/or validating cryptocurrency transactions between a buyer and a seller.

In particular, the use of cryptocurrency was prohibited for:

  1. use as a medium of exchange, store of value or unit of account,
  2. use as a payment system,
  3. providing services such as registering, trading, selling or clearing of cryptocurrency to individuals,
  4. trading it with other currencies,
  5. issuing financial products related to it,
  6. using it as a basis of credit,
  7. issuing it as a means of raising funds, and
  8. issuing it as a means for investment.

Why the govt wants to ban cryptocurrencies?

Sovereign guarantee

  • Cryptocurrencies pose risks to consumers.  They do not have any sovereign guarantee and hence are not legal tender.

Market volatility

  • Their speculative nature also makes them highly volatile.  For instance, the value of Bitcoin fell from USD 20,000 in December 2017 to USD 3,800 in November 2018.

Risk in security

  • A user loses access to their cryptocurrency if they lose their private key (unlike traditional digital banking accounts, this password cannot be reset).

Malware threats

  • In some cases, these private keys are stored by technical service providers (cryptocurrency exchanges or wallets), which are prone to malware or hacking.

Money laundering

  • Cryptocurrencies are more vulnerable to criminal activity and money laundering.  They provide greater anonymity than other payment methods since the public keys engaging in a transaction cannot be directly linked to an individual.

Regulatory bypass

  • A central bank cannot regulate the supply of cryptocurrencies in the economy.  This could pose a risk to the financial stability of the country if their use becomes widespread.

Power consumption

  • Since validating transactions is energy-intensive, it may have adverse consequences for the country’s energy security (the total electricity use of bitcoin mining, in 2018, was equivalent to that of mid-sized economies such as Switzerland).

Blockchain Technology: Prospects and Challenges

Private: Use Blockchain Technology to improve governance

In India, present administrative affairs grapple with leakages in public delivery of welfare and development goals on account one critical problem- manual processes that can be very easily manipulated. These are often so complex and laborious that even a well-intentioned public servant is chary of implementing beneficial decisions. Technology can cut through much of these daunting processes.

What is Blockchain Technology?

  • Blockchain technology is a structure that stores transactional records (known as the block) of the public in several databases (known as the chain) in a network connectedthrough peer-to-peer nodes. This storage is referred to as a digital ledger.
  • The three key principles of blockchain technology are transparency, decentralisation and accountability.

How can India utilize Blockchain Technology?

  • In the next decade, the business of Indian government is going to experience massive disruptions. This comes on the back of technological enhancements that reduce the need for intermediaries and ensure that the sanctity of process remains unimpeachable.
  • NITI Aayog identified use-cases where the technology can potentially improve governance ranging from tracing of drugs in the pharmaceutical supply chain to verification of education certificates.
  • One of the most productive areas of intervention for blockchain technology would be in land records.
  • A vast developing country like India, with its diverse land tenure systems, is bound to have major problems in this area.  The system is riddled with inefficiencies that reduce trust in the government.
  • Currently the United Nations Development Programme is involved in Proof of Concept pilots across India. Through this technology;
    • create an immutable history of transactional records that helps in checking authenticity;
    • create a tamper-proof system to avoid forgery;
    • create a distributed ledger so that all stakeholders see the same information and set up a secure encrypted environment, where updates are available in near real time.
  • The NITI Aayog notes that, in order to ensure that transactions are not fraudulent, the physical presence of witnesses is mandated at the time of sales deed registry.
  • Deployment of blockchain would potentially eliminate the need of these processes while maintaining the sanctity of the transaction.
  • Blockchain helps create a tamper-proof audit trail that allows for tracking decision-making and ensures that such decisions are in accordance with anti-corruption principles.
  • It addresses concerns around cyber security that come with any effort towards digitisation. Currently there are interesting pilots being conducted across the world, where deployment of blockchain is being tested for public procurement.
  • From the perspective of Internal Controls and Governance (Vigilance), blockchain is strongly recommended to employ a five-part test while assessing such deviations from process:
    1. Whether the issue being pursued has corruption connotations;
    2. The general reputation of the employee involved;
    3. Whether better options were available and ignored without valid reasoning;
    4. Whether the situation inhibited the selection of any other option but the one finally chosen;
    5. Whether the larger interest of the organisation was safeguarded.
  • However, a significant factor in blockchain’s success will be the ability to develop/reform laws and building robust data protection and maintenance regimes.
  • The general environment now is in favour of a regime which ensures that companies not only do profitable business but do so in an ethical manner.

Government Efforts:

  • The enactment of the Public Procurement Bill, Lokpal Act incorporating, inter alia, the disclosure of assets by public servants and reforms in higher judicial appointments to name a few.
  • The government launched the Government e-Marketplace (GeM) in 2016 for goods and services required by central and state governments, and public sector undertakings.
  • The price reduction of approximately 56% of goods and services coupled with demand aggregation has led to savings of ₹40,000 crores annually.
  • The government made a significant change to the Prevention of Corruption Act in 2018. In the earlier regime, even honest public officials were harassed if a decision provided pecuniary advantage to a person without any public interest.
  • The element of intention has been added under the definition of criminal misconduct. Similarly, broadening the definition of “unfair advantage” and the introduction of corporate criminal liability will go a long way in apprehending or deterring those indulging in bribery.
  • United Nations Convention against Corruption ratified by India in 2011 as well as the anti-corruption principles of the Organization for Economic Cooperation & Development (OECD) cover a wide swathe of vulnerable areas and aspects of business operations including anti-bribery, public procurement and conflict of interest.


  • The problem of corruption in the social and political spheres has often come in for strident criticism.
  • It can be argued that corruption in public life, directly or indirectly, adversely affects the achievement of United Nation (UN)’s sustainable development goals (SDGs).
  • Governments are expectedly risk-averse in dealing with both public policies and public money while enterprises thrive on risk-taking. This often hobbles the entrepreneurial spirit in the public sector.
  • The public procurement economy in India constitutes about 20% of the Gross Domestic Product (GDP), it is imperative to build on this initiative with a view to onboard as many goods and services as possible.


  • In the recent discourse on procurement methods, transparency of policy, procedure and practices is increasingly being seen as an imperative when utilising public money.
  • However, transparency is not an end in itself. The whole process must be open to public scrutiny.
  • It is important to institutionalise a system where compliance and established processes can be routinely checked and quantified.
  • A metrics-based system for oversight in governmental processes will bring about transparency, build trust with citizens and spur further digital innovation to make any administration more robust.
  • It is only through robust yet streamlined procedures that a bureaucrat can achieve the intended outcome and avoid unintended consequences.
  • India must focus on the well-intentioned public servant who finds the processes leading to greater transparency and ensuring value for taxpayers’ money cumbersome.


Blockchain is likely to have a significant impact in creating an integrity-first governance ecosystem. India needs to review existing legal frameworks to address issues around, inter alia, data security, corrupt practices and corporate governance with a view to address anti-corruption objectives.

Blockchain Technology: Prospects and Challenges

Private: Blockchain Technology and COVID-19


The coronavirus has impacted countries, communities and individuals in countless ways, from school closures to health-care insurance issues, not to undermine loss of lives. As governments scramble to address these problems, different solutions based on blockchain technologies have sprung up to help deal with the worldwide crisis.


What is Blockchain Technology?

Simply, blockchain is decentralized, distributed and public digital ledger.  Blockchains is a new type of network infrastructure (a way to organize how information and value move around on the internet) that create ‘trust’ in networks by introducing distributed verifiability, auditability, and consensus.

Blockchains create trust by acting as a shared database, distributed across vast peer-to-peer networks that have no single point of failure and no single source of truth, implying that no individual entity can own a blockchain network, and no single entity can modify the data stored on it unilaterally without the consensus of its peers.

New data can be added to a blockchain only through agreement between the various nodes of the network, a mechanism known as distributed consensus. Each node of the network keeps its own copy of blockchain’s data and keeps the other nodes honest – if one node changes its local copy, the other nodes can reject it.

imagine a blockchain as a ledger—because that’s essentially how most blockchains function. Each block of data represents some new transaction on the ledger, whether that means a contract or a sale or whatever else you’d use a ledger for.

Interestingly, blockchains leverage techniques from a field of mathematics and computer science, known as cryptography, to sign every transaction (e.g. the transfer of assets from one person to another) with a unique digital signature belonging to the user who initiated the transaction.

Blockchains and Cryptocurrency – How it all began?

A cryptocurrency is a digital or virtual currency that uses cryptography for security.  The Bitcoin protocol is built on the blockchain.

  • Bitcoin is an example of electronic or digital currency that works on a peer-to-peer basis.
  • Bitcoins can be sent digitally to anyone who has a bitcoin address anywhere in the globe. One person could have multiple addresses for different purposes – personal, business and the like.
  • A bitcoin is not printed currency but is a non-repudiable record of every transaction that it has been through. All this is part of a huge ledger called the blockchain.

There’s also a new cryptocurrency called Libra rolled out by Facebook.

  • Initially, blockchain technology was linked to cryptocurrency only but today it’s application are widespread.

Various uses of Blockchain in fighting COVID-19

Blockchain could be used to improve a variety of healthcare-related processes, including record management, healthcare surveillance, tracking disease outbreaks, management crisis situations and many more.

1) Tracking Infectious Disease Outbreaks

  • Blockchain can be used for tracking public health data surveillance, particularly for infectious disease outbreaks such as COVID-19.
  • With increased blockchain transparency, it will result in more accurate reporting and efficient responses.
  • Blockchain can help develop treatments swiftly as they would allow for rapid processing of data, thus enabling early detection of symptoms before they spread to the level of epidemics.

2) Donations Tracking

  • As trust is one of the major issues in donations, Blockchain has a solution for this issue.
  • There has been a concern that the millions of dollars being donated for the public are not being put to use where needed.
  • With the help of blockchain capabilities, donors can see where funds are most urgently required and can track their donations until they are provided with verification that their contributions have been received to the victims.

3) Crisis Management

  • Blockchain could also manage a crisis situation. It could instantly alert the public about the Coronavirus by global institutes like the WHO using smart contractsconcept.
  • Not only it can alert, but Blockchain could also enable to provide governments with recommendations about how to contain the virus.
  • It could offer a secure platform where all the concerning authorities such as governments, medical professionals, media, health organizations, media, and others can update each other about the situation and prevent it from worsening further.

4) Securing Medical Supply Chains

  • Blockchain has already proven its success stories as a supply chain management tool in various industries; similarly, it could also be beneficial in tracking and tracing medical supply chains.
  • Blockchain-based platforms can be useful in reviewing, recording, and tracking of demand, supplies, and logistics of epidemic prevention materials.
  • As supply chains involve multiple parties, the entire process of record and verification is tamper-proof by every party, while also allowing anyone to track the process.

6) Education

  • ‘Certificates’ are a means of verifying the credentials of individuals across domains and geographies. A paper-based certification is fallible to manipulation and susceptible to fraud.
  • The blockchain-based SuperCert promises anti-fraud identity intelligence blockchain solution for educational certificates.
  • The immutability feature of blockchain ensures that tampering of certificate is not feasible – both the content of the certificate and the identity of the certificate holder.

7) Finance

  • Blockchain integration in financial transactions will not only save time and money, but it will also make the transaction processing and authentication process much more seamless.
  • Furthermore, Blockchain can be an excellent tool to monitor money laundering and black money accumulation – since all transactions are permanently stored on the Blockchain network, every transaction is accountable.
  • Blockchain is also capable of dealing with issues like double spending and unauthorized spending.
  • With Covid panic on use of cash currency, here one may find alternatives too.

Various Challenges in adopting Blockchains

Any transformative technology, in its initial stages of development, as it moves out of the research/development phase to first few applications to large scale deployment, faces several challenges.

  • There is no confidence in the technology: It is still an innovation. Building trust in the network represents a challenge for blockchain.
  • High costs and complexity of blockchain.
  • Lack of understanding comes next as many executives have a vague understanding of blockchain and the changes it will bring. Many still connect it only with cryptocurrencies management.
  • A general lack of standards is also a problem. Blockchain-specific vocabulary is insufficient; its terminology is both scarce and new.
  • A lack of general regulation is a problem. The Supreme Court of India has ruled against a decision imposed by the country’s central bank nearly two years ago that stifled crypto trading in Asia’s third-largest economy.
  • Vague data regulation in countries due to poor laws and policy is one more issue.
  • Lack of blockchain talent: Whenever a groundbreaking technology emerges, the developer community needs time and resources to accommodate the new demand.
  • Energy consumption The majority of blockchains present in the market consume a high amount of energy. It requires high amounts of computation power to solve a complex mathematical problem to verify and process transactions and to secure the network. Add to this the energy needed to cool down the computers, and the costs increase exponentially.

Blockchain: the India imperative

India has a unique strategy for the Government to take the lead in creating public digital infrastructure and allowing private sector innovation to leverage Blockchain for further development.

NITI Aayog has released recommendations to establish India as a vibrant blockchain ecosystem. The suggested recommendations include:

  • Regulatory and policy considerations for evolving a vibrant blockchain ecosystem
  • IndiaChain: Creation of a national infrastructure for the deployment of blockchain solutions with inbuilt fabric, identity platform and incentive platform
  • India as blockchain hub: promotion of research and development in blockchain, in addition, to focus on skilling of workforce and students
  • Procurement process for government agencies to adopt blockchain solutions
  • Cryptocurrencies for India: Pegged stable coin for Indian Rupee for seamless exchange for blockchain solutions. This may be in conjunction with the need for re-evaluating cryptocurrencies.

Way Forward

  • Although India is still at the nascent stage in exploring Blockchain technology, it holds is immense potential for Blockchain applications.
  • The key lies in overcoming the challenges faced during the early adoption phase – if we can get past the obstacles in the initial stage, Blockchain tech can be put to good use to strengthen the Indian economy.
  • The days of blockchain application have just begun and as with any new technology, blockchain will hit a few roadblocks especially with the government’s regulators across the globe.
  • As the true essence of blockchain application is to take the power away from the hands of the powerful by decentralizing information and handing it over to the people- democracy in true sense.
  • Nonetheless as with any movement, if people see the value the technology brings into their lives they will rally behind it and blockchain application will become mainstream in most industries in the coming years.


By providing help in the COVID-19 crisis and recovery, blockchain can play a pivotal role in accelerating post-crisis digital transformation initiatives and solving those problems highlighted in the current system.

However, at the present moment, blockchain is not the panacea of all the problems. While the promise and potential of blockchain are undoubtedly transformative, it is still in the nascence of its evolution.

Keeping a tab on this technology and our capacities is the right direction we can head towards.

Blockchain Technology: Prospects and Challenges

E-Renminbi: China’s Official Digital Currency


From UPSC perspective, the following things are important :

Prelims level : e-RMB

Mains level : Cryptocurrency and its feasiblity

China in a significant move has launched a trial of digital yuan in four urban centres of the country for specific services even as the world grapples with the containment of Covid.

What is a cryptocurrency? Discuss how a vibrant cryptocurrency segment could add value to India’s financial sector. (250 W)

Prelims Perspective:-

1. Subtle differences btn digital and virtual currency – e.g. Regulatory issues

2. Which countries have official virtual currency – e.g. Petro of Venezuela


  • It will be the electronic form of the renminbi, with a value equivalent to the paper notes and coins in circulation.
  • The People’s Bank of China, the country’s central bank, will be the sole issuer of the digital yuan, initially offering the digital money to commercial banks and other operators.
  • It will be launched in major cities of Shenzhen, Suzhou and Chengdu, as well as the Xiong’an New Area.
  • It aims to change the financial system in big ways — by cutting costs and making transactions easier, more convenient and more transparent.
  • The public would be able to convert money in their bank accounts to the digital version and make deposits via electronic wallets.

Back2Basics: Cryptocurrency

  • A Cryptocurrency is an internet-based medium of exchange which uses cryptographical functions to conduct financial transactions.
  • It leverages blockchain technology to gain decentralization, transparency, and immutability.
  • The most important feature of a cryptocurrency is that it is not controlled by any central authority: the decentralized nature of the blockchain makes cryptocurrencies theoretically immune to the old ways of government control and interference.
  • It can be sent directly between two parties via the use of private and public keys.
  • Unlike decentralized cryptocurrencies, such as bitcoin, that allow users to transfer value with no central authority or third party involved, the government-backed digital currency is preferred.

What are Blockchains?

  • Blockchain, sometimes referred to as Distributed Ledger Technology (DLT), makes the history of any digital asset unalterable and transparent through the use of decentralization and cryptographic hashing.
  • Blockchain consists of three important concepts: blocks, nodes and miners.
  • Nodes can be any kind of electronic device that maintains copies of the blockchain and keeps the network functioning.
  • Miners create new blocks on the chain through a process called mining.

Blockchain Technology: Prospects and Challenges

India can use Yes Bank debacle to chase China in Crypto


From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3- Is cryptocurrency solution to bad governance in the banking system in India?


There’s an opportunity to stabilize the financial system and prevent a rival power from widening its lead.

The backdrop of YES bank failure time for cryptocurrency

  • Perfect time for cryptocurrency: Confidence in the Indian financial system has been breaking down for some time. Instead of trying to restore trust, it may be time to require less of it — with the help of an official rupee cryptocurrency.
  • The last straw: The collapse of corporate lender Yes Bank Ltd. was the last straw, which failed in slow motion in full view of authorities.
    • Depositors have been assured that their $20 billion-plus in stuck funds will be released after a rescue by the government-controlled State Bank of India.
    • What could be the impact on the sentiment of the people? While that may help prevent widespread panic, even temporarily stopping people from accessing their funds would mean that from now on, not all savings and current accounts will be treated by individuals and businesses as a perfect substitute for cash.

Why it would be costly and difficult to revive the public faith?

  • It will be both difficult and costly to revive the public’s dwindling faith.
  • Nationalisation not an option: A nuclear option is to nationalize the banks and non-bank finance firms that provide $1.75 trillion in annual funding. Doing so would be a doomed throwback to the late 1960s when India lurched toward stultifying socialist-style state controls.
  • Corruption in banking won’t go away: Similarly, it would be unrealistic to assume that the Yes Bank embarrassment would trigger an improvement in the status quo.
    • Deep crony-capital relationship: The crony-capital relationships between financiers and borrowers in India are steeped in its colonial history.
    • Basel III won’t solve the problem: Putting on the gloss of Basel III capital requirements, which are supposed to make lenders less prone to failure, doesn’t make corruption in banking go away.

Can cryptocurrency be an answer?

  • It offers hope: Blockchain technology, which the Indian establishment is trying to snuff out in finance, offers hope. Government should consider official crypto to obviate the need for trusted intermediaries, which are in short supply, anyway.
  • China expected to launch digital currency: Before the coronavirus outbreak, China was widely expected to start its own central bank digital currency this year.
    • But India’s need is greater, and its motivation very different from Beijing’s desire to shake the hegemony of the dollar.
  • After the Yes Bank debacle and botched rescue, deposits in India will probably gravitate toward four or five large lenders, whose managers may be emboldened to make risky bets with other people’s money. The remaining banks will struggle for liquidity. A perennially unstable credit delivery network will always be one misstep away from the next blowup. While every country has its share of manias, panics and crashes, to be gripped by absolute financial mistrust every few years is not an environment where growth can flourish.
  • Opportunity to think afresh: Earlier this month, India’s highest court set aside the Reserve Bank of India’s directive that asked banks to not offer services to cryptocurrency traders and exchanges.
    • A legal defeat has provided the opportunity to think afresh.
    • But in parallel, the government is considering a blanket ban on private virtual tokens. The crypto activity could get slammed again.
  • Possibility of misuse: To be sure, one popular use of technology is money laundering.
    • But to kill the industry and send practitioners packing would be to lose out on a valuable innovation at a time when India needs to build on the globally recognized successes of its digital payments industry, which has gained users’ trust just as banks and shadow banks have lost it.

Implications for deposit in the aftermath of Yes bank debacle

  • Deposits may gravitate towards big banks: After the Yes Bank debacle and botched rescue, deposits in India will probably gravitate toward four or five large lenders, whose managers may be emboldened to make risky bets with other people’s money.
    • The remaining banks will struggle for liquidity.
  • Next blowup: A perennially unstable credit delivery network will always be one misstep away from the next blowup.
  • Impact on growth: While every country has its share of manias, panics and crashes, to be gripped by absolute financial mistrust every few years is not an environment where growth can flourish.

Possible pathways for central banks digital currency

  • Pathways suggested by BIS: After surveying 17 projects around the world — from Norway and Sweden to China, Cambodia and South Africa — the Bank for International Settlements (BIS) has identified four possible pathways for a central bank digital currency.
  • Starting point- Rupee token: Of the pathways suggested by the BIS, a rupee token that doesn’t require the holder to have an account with anyone but has value guaranteed by the Reserve Bank of India could be a starting point.
  • Who should enable the fund transfer? Cryptography (“I know a secret, therefore I own the funds”) rather than an account relationship (“I am who I say I am, therefore I own the funds”) would be used to enable transfers.
    • Later, the RBI can open up the validation of transactions to authorized parties on distributed ledgers.
  • What is the current system and issues with it? Currently, a deposit holder has to rely on everyone from the bank’s management and board to the auditors, the rating firms and the regulator to do their jobs.
    • When they all fail, as in the case of Yes, the bank’s chequebook, ATM card, and online banking password cease to generate liquidity.
    • Deposits stop being the same as cash, even if the state guarantees their safety.
    • It would be far less painful if deposit owners only had to trust the RBI, not as a banking regulator but as a money-printing authority that could never run out of resources to settle its IOUs.


  • China’s ambition challenge dollars position as a reserve currency: China wants the yuan to take over from the dollar as the world’s reserve currency. A tech-enabled global alternative to the greenback — of the kind that Facebook Inc.’s proposed Libra had threatened to be — would have been an obstacle. Hence, Beijing accelerated its tokenized currency initiative.
  • India should jump the bandwagon: India needs to jump on the bandwagon for self-preservation. If the RBI doesn’t make easy-to-transact digital rupees available and leaves ordinary folks at the mercy of poorly run and supervised banks like Yes, people would rather store their wealth in Silicon Valley-sponsored tokenized money — or Beijing’s digital yuan — whenever they arrive.

Blockchain Technology: Prospects and Challenges

Supreme Court ruling on Virtual Currency


From UPSC perspective, the following things are important :

Prelims level : Virtual Currency, Cryptocurrency

Mains level : Issues with Blockchain Technology

The Supreme Court in a significant move has set aside a ban by the Reserve Bank of India (RBI) on banks and financial institutions from dealing with virtual currency holders and exchanges.

Why did the Supreme Court ban virtual currencies?

  • In a circular in 2018, the RBI had banned banks from dealing with virtual currency exchanges and individual holders on the grounds that these currencies had no underlying fiat.
  • RBI held that it was necessary for the larger public interest to stop banks from providing any services related to these.

Why was the ban unjustified?

  • The court held that the ban did not pass the “proportionality” test.
  • The test of proportionality of any action by the government, the court held, must pass the test of Article 19(1) (g) which states that all citizens of the country will have the right to practise any profession, or carry on any occupation or trade and business.

What are virtual currencies?

  • There is no globally accepted definition of what exactly is virtual currency.
  • Some agencies have called it a method of exchange of value; others have labelled it a goods item, product or commodity.
  • In its judgment the apex Court observed- Every court which attempted to fix the identity of virtual currencies, merely acted as the 4 blind men in the Anekantavada philosophy of Jainism, who attempt to describe an elephant but end up describing only one physical feature of the elephant.

Similarities with Bitcoin

  • Satoshi Nakamoto widely regarded as the founder of the modern virtual currency bitcoin and the underlying technology called blockchain defined bitcoins as “a new electronic cash system that’s fully peer-to-peer, with no trusted third party”.
  • This essentially meant there would be no central regulator for virtual currencies as they would be placed in a globally visible ledger, accessible to all the users of the technology.
  • All users of such virtual currencies would be able to see and keep track of the transactions taking place.

Are they different from cryptocurrencies?

  • Virtual currency is the larger umbrella term for all forms of non-fiat currency being traded online. Virtual currencies are mostly created, distributed and accepted in local virtual networks.
  • Cryptocurrencies, on the other hand, have an extra layer of security, in the form of encryption algorithms.
  • Cryptographic methods are used to make the currency as well as the network on which they are being traded, secure.
  • Most cryptocurrencies now operate on the blockchain or distributed ledger technology, which allows everyone on the network to keep track of the transactions occurring globally.

Are cryptocurrencies dangerous?

  • The jury is out on that. Organisations across the globe have called for caution while dealing with virtual currencies.
  • A blanket ban of any sort could push the entire system underground, which in turn would mean no regulation.
  • In June 2013, the RBI had for the first time warned users, holders and traders of virtual currencies about the potential financial, operational, legal and customer protection and security-related risks that they were exposing themselves to.
  • The following year, the FATF came out with a report that highlighted both legitimate uses and potential risks associated with virtual currencies.
  • In a different report, it again said the use of such virtual currencies was growing among terror financing groups.

Why did the RBI ban virtual currencies?

  • Owing to the lack of any underlying fiat, episodes of excessive volatility in their value, and their anonymous nature which goes against global money-laundering rules, the RBI initially flagged its concerns on trade and use of the currency.
  • Risks and concerns about data security and consumer protection on the one hand, and far-reaching potential impact on the effectiveness of monetary policy itself on the other hand, also had the RBI worried about virtual currencies.
  • In its arguments, RBI said it did not want these virtual currencies spreading like a contagion, and had, therefore, in the larger public interest, asked banks not to deal with people or exchanges dealing in these non-fiat currencies.
  • The RBI perceived significant spurt in the valuation of many virtual currencies and rapid growth in initial coin offerings as a risk.

Proponent’s stance

  • They said the RBI action was outside its purview as the non-fiat currency was not a currency as such.
  • They also argued that the action was too harsh and there had been no studies conducted either by the RBI or by the central government.
  • Arguing that the ban was solely on “moral grounds”, the petitioners said the RBI should have adopted a wait-and-watch approach, as taken by other regulators such as SEBI.

Faring the Proportionality test

  • In its judgment, the Supreme Court held that the RBI directive came up short on the five-prong test to check proportionality.

It includes:

  • the direct and immediate impact upon fundamental rights
  • the larger public interest sought to be ensured; a necessity to restrict citizens’ freedom
  • inherent pernicious nature of the act prohibited or its capacity or tendency to be harmful to the general public
  • the possibility of achieving the same object by imposing a less drastic restraint

Way Forward

  • The Supreme Court’s judgment could lead to the RBI rethinking its policies surrounding virtual currencies.
  • It is expected that the RBI will reconsider its approach to cryptocurrency and come up with a new, calibrated framework or regulation that deals with the reality of these technological advancements.
  • The decision will help those investors who had used legitimate money through banking channels.
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emma johnson
emma johnson
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Catrin Brooks
Catrin Brooks
5 months ago

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Last edited 5 months ago by Catrin Brooks


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