1. Why Cryptocurrencies?
  2. What is Cryptocurrency?
  3. What does Budget-2018 say about Cryptocurrency?
  4. Cryptocurrency Mining = Environmental degradation & Digital Divide
  5. Cryptocurrency Payment system= Illegal Activities & Tax evasion
  6. Cryptocurrency Exchange Systems also bad because:
    1. Avoidance of capital gains tax
    2. Speculation, volatility, and erosion of savings
    3. VC & Ponzi investment schemes
  7. Banning of Unregulated Deposit Schemes Bill, 2018
  8. Venezuela and PETRO coins (2018, Jan)
    1. What is Petro coin?
    2. Why Petro coins issued?
  9. Marshall Island and SOV (2018, Feb)
  10. Interval
  11. Mock question for UPSC Prelims

Why Cryptocurrencies?

  • Even before the invention of money, people used to trade with each other using a barter system, but it suffered from a limitation- “Double coincidence of wants” i.e. Ajay wants to trade his wheat for Vimal gutkha, but Bansi.M is ready to exchange his Vimal Gutkha only for tea. Their “wants” are not coinciding with each other, so they can’t trade.
  • Hence money was invented, to serves 2 primary functions in any economy: 1) measure of value 2) medium of exchange.
  • Over the centuries, this money gradually evolved from:
  • 1) Commodity money: Cocoa-beans, tobacco leaves, and Gold nuggets but they were either perishable or lacked uniform weight and purity.
  • 2) Metallic Money: Full bodied coins and then Token coins but they were bulky to transport.
  • 3) Paper Money: Fiduciary money, fiat money, limited & unlimited legal tenders.
  • 4) Bank money: Chequebook, demand drafts, NEFT-RTGS.
  • But in the recent years, some tech-savvy anarchists groups grew dissatisfied with #3 and #4 forms of money, because Dollar (a paper currency)’s exchange rate had declined post-subprime crisis. Bankers and card-companies charge commission on every transaction, and bankers themselves were responsible for the sub-prime crisis.
  • So, these anarchists invented the fifth form of money that is “crypto-currency”. [Anarchism is a political philosophy that advocates self-governed societies. So, in this context, don’t confuse an Anarchist with an Arsonist]

What is Cryptocurrency?

  • Cryptocurrency is a digital currency created, stored and transacted using blockchain technology.
  • Bitcoin, Digicoin, Litecoin, Etherium, Laxmicoin are some of the examples. Among them, Bitcoin, invented by an anonymous user Satoshi Nakomoto (2009) is the most popular cryptocurrency.
  • Usually, three ways to obtain a cryptocurrency:
  1. Mining using special software & high-speed computer.
  2. As PAYMENT by selling goods & services to a Miner or person who already owns cryptocurrency.
  3. Purchasing cryptocurrency using legal tender (such as rupee, dollar).

I’ve explained above topics in much finer details in video number 2, 3 and 4 in my last year’s BES171 Lecture series. The present article under BES181 is only ‘updating’ that knowledge base in the light of latest budget-2018.

What does Budget-2018 say about Cryptocurrency?

  1. Crypto-currencies are not legal tenders in India. (Only Indian rupee is the “legal tender” for settling debts and financial obligations in India.)
  2. We’ll eliminate the use of these cryptocurrencies in financing illegitimate activities.
  3. We’ll eliminate the use of these cryptocurrencies as part of the payment systems. (e.g. IF Paytm or Mobikwik allowed users to buy movie tickets using bitcoins instead of the Indian rupee, then action will be taken.)
  4. BUT, we will use block-chain technology (of these cryptocurrencies) for encouraging the digital economy.

This implies Arun Jaitley doesn’t like Cryptocurrencies, NOT ONE BIT. WHY?

Cryptocurrency Mining = Environmental degradation & Digital Divide

The first way to obtain cryptocurrencies is “mining” i.e. you install a software like CGminer, BTCMiner, DiabloMiner and your computer begins to solve/decode the data block, then you get rewarded with bitcoin in your digital wallet.

  • In bitcoin system, maximum coins that all miners can collectively fetch is 21 million, and each coin can be subdivided into 108 Satoshi units. And just like video game stages, the more miners progress, it becomes harder and harder to mine. e.g. If initially, your PC could mine 1 coin per day, now it’ll require 30 days.
  • This mining speed is technically measured in ‘hash-rates’. If your computer has more than one graphics card, it will give a higher speed.
  • So, big miners would assemble a PC with 4-5 graphics cards, and then loop 50-100 PCs together and use their collective computing power to solve the data blocks in a faster manner than other miners.
  • Because of this bitcoin-mania, graphics card prices have increased by 2 to 4 times in the last year. This increases DIGITAL DIVIDE because rural/poor youth can’t afford it even for educational purpose or to become self-employed in DTP, multimedia, VFX work etc.
  • To solve bitcoin data blocks, you’ve to keep the computer running 24×7 for weeks and months. This degrades the lifecycle of hardware, increases e-waste generation and electricity consumption.
  • Experts estimate that cryptocurrency related electricity consumption generates 20 megatonne CO2 annually. This is equivalent to the pollution caused by 1 million trans-Atlantic flights.

Cryptocurrency Payment system= Illegal Activities & Tax evasion

Suppose you do not have a high-speed computer but still interested to own bitcoins. The the second way to obtain bitcoins is: find a person who already has bitcoins, and sell him your goods/services and receive bitcoin instead of rupee/dollars as payment. This is bad for society and economy because:

  • Many shopkeepers allow payment from PAYTM app. But PAYTM app is linked to mobile numbers, and to obtain a mobile number, you’ve to give photo-id proof. The money is ultimately transferred to a bank account, but you’ve to provide KYC documents to open a bank account. Therefore, if a pimp, drug-peddler, hawala-operator or terrorist was using PAYTM for receiving money, police can track him & prove the financial transactions in illegal activities the court from those bank-records.
  • An ordinary shopkeeper is using PAYTM / UPI-BHIM walli mobile payment system for selling legal items, but if he is not submitting indirect tax on the sale of goods/services or not submitting direct tax on his profit- then Ajay DEVGAN can RAID him. [कोष मूलो दंड]
  • But, this is not possible in bitcoin digital wallets, because they have a public address (instead of a mobile number or email id) and private key (password), which are non-traceable. Two parties can trade without knowing the identity of each other (there is no ‘truecaller app’ for finding the identity of bitcoin public-address!)
  • There was an e-commerce site ‘silk road’ where Narcotic drugs were sold using Bitcoin as a currency, and FBI could prove the case by drugs-delivery and indirect exchange of dollars to bitcoins but it’s both a technological and legal nightmare for law-enforcement agencies.

Cryptocurrency Exchange Systems also bad because:

Suppose you don’t have a high-speed computer to mine bitcoins, suppose you have no goods and services to sell to a bitcoin owner then the third way to obtain bitcoin is- give that person rupee, dollar or any other legal-tender currency in exchange. But this is bad for society and economy because:

Avoidance of capital gains tax

  • If Indian student wants to convert rupees into dollars for admission in the USA, he’ll approach a Foreign exchange dealer. But all foreign exchange dealers have to register with RBI under the foreign exchange Management act (FEMA), and they’ve to keep documentary records about currency exchanges. Therefore, terror-finance and offshore money-laundering is rather difficult. But, the “bitcoin exchange websites” (i.e. where you can exchange rupee or dollar for Bitcoins) operate outside this supervision, hence dangerous.
  • Suppose you buy 1 Bitcoin for $5000. Later someone buys the same bitcoin from you for $10,000, you’ll can profit! Had invested rupees in share market or gold, and made PROFIT like this, then you had to pay capital gains tax (one type of direct tax) on this profit. But since crypto-currency transactions are non-traceable, the government is deprived of tax-revenue.
  • Yes, if a bank account or credit card is used for purchasing bitcoin from an online portal, and the resultant profits were converted into rupees and deposited into a bank account, then Income tax officials can indirectly try to trace it and send notices. (They’ve been doing since February 2018)

Speculation, volatility, and erosion of savings


  • Observe the following graph of bitcoin to dollar exchange rate. If an investor had spent $ 20,000 to purchase a bitcoin in December, he’d have made substantial losses.
  • If you invested in US treasury bonds or Indian Government’s securities (G-Sec), you’re assured of earning interest, because these are backed by the respective governments. Bitcoin, Digicoin, Litecoin, Etherium Don’t have any sovereign nation’s backing. (Yes, Marshall Island’s “SOV” and Venezuela’s “Petro” cryptocurrency have a sovereign backing- we’ll see in the later part of this article.)
  • If you invested in gold bullion, even if prices crash, still you have a commodity with an Intrinsic value (i.e. gold can be used in jewelry, electronic circuits and in preparation of Sonaa-Chaandi Chyawanpraash.). Cryptocurrency has no intrinsic value, It is just a virtual data code [उसका आचार नही डाल सकते].
  • Cryptocurrencies fetch hundreds and thousands of dollars because new supply comes at slow-pace due to limitations of present-day computing technology in solving crypto-data blocks. But once quantum-computing technologies develop more, some geek can decode all the data blocks in a matter of seconds and then flood the market with such coins, It will crash the prices.
  • India has neither 100% digital literacy nor 100% financial literacy. So, by reading half-truthed WhatsApp messages, ordinary people may invest and lose their savings in such speculative games.

VC & Ponzi investment schemes

  • 2018, Feb: The price of one bitcoin was ~ 6 lakh rupees. Difficult for an Individual Indian to purchase a bitcoin.
  • But, 1 Rupee = 100 paisa and 1 Bitcoin = 108 Satoshi. So accordingly Rs.~5000 = 0.0089 Bitcoins- that much amount many Indians could afford to invest.
  • So, Ponzi scamsters collect / pool money from people, with the promise of buying bitcoin, and giving them ‘fractional-ownership’. Scamster also promises to sell the said bitcoin when bitcoin: dollar exchange rate escalate and redistributing profit according to the fractional ownership.
  • But in reality, scamster will not purchase the bitcoin, he’ll simply give group#2 and #3’s money to group#1, like that continues the game until he has built a large cache to run away.

Banning of Unregulated Deposit Schemes Bill, 2018

2017-December Finance Ministry cautioned Indians about above danger ki: Virtual Currencies are like Ponzi Schemes.
2018-Feb-1 Budget says we’ll stop the use of Crypto-currencies In illegal activities.
2018-Feb-13-18 First Citibank and then HDFC Prohibited the use of credit/debit cards for purchasing bitcoins and other crypto-currencies.
2018-Feb-20 Cabinet approves “Banning of Unregulated Deposit Schemes Bill, 2018“.
2018-March-1 Some fake news sites mention that “Laxmicoin, India’s first Official cryptocurrency has been launched.” There WhatsApp messages soliciting people to invest in it using phishing links.
2018-March-10 Authentic newspapers announce “This is a fraud, the government does not recognize any cryptocurrency as legal tender.” Bengaluru based Laxmicoin-startup founders also clarified that “Our crypto currency is not associated with any government agenda or initiative.”

None of these dates are important, I have only mentioned them to narrate the story’s sequence of events.
Presently, the regulators take ex-post action (कांड होने के बाद) e.g. After Subroto Roy took Junta’s money for SAHARA Schemes, SEBI initiated action afterwards, that it was illegal collective investment scheme. The case is going on for years and the money is not yet returned to the investors. Same with Sarada Chit fund scam, Rose Valley Chit fund scam.

This new bill makes “ex-ante” provisions (यानी की कांड होने से पहेले से ही प्रतिबन्ध…) That no one can Issue advertisements or accept money in schemes like:

  • Jewelry schemes where consumers pay 11 installments while the company pays the 12th one.
  • Builder offering fixed return on investment until construction is completed.
  • Although this bill does not have specific mention of cryptocurrencies or bitcoins, since it bans all type of unregulated deposit schemes so any scamster advertising / soliciting to people to give him money for the purchase of bitcoins- he will face action.
  • State Government will have to designate authority for attaching assets and redistributing investors’ money within deadlines. Provisions for jail and fines.

Venezuela and PETRO coins (2018, Jan)

Observe नकशा, the map.
Venezuela Petro

  • Falkland Island: is a Disputed territory claimed by both Argentina and UK. A war fought between them in 1982.
  • Ecuador’s Galapagos Island: Here, Charles Darwin discovered several species of finches that varied from island to island. So, he develops a theory of natural selection and authored “On The Origin of Species.”
  • Argentina is important because WTO’s last ministerial conference was held in its capital Buenos Aires (2017-December). Although the conference remained inconclusive. Why? Find out in this article?
  • Anyways, for the purpose of the present article, the important location in South America is Venezuela (Capital Caracas.) In your school atlas, find out following: ) Does the Equator pass from this country? 2) Where is Panama canal? 3) Name of the neighboring countries?

What is Petro coin?

In 2018 – January, President Nicolas Maduro announced the following:

  1. The government of Venezuela will issue 100 million petrol coins – a type of cryptocurrency.
  2. The price of 1 Petro coin will equal the market price of one oil barrel from Venezuela. [so in February-2018, it’d have been 1 Petro coin =~ 65 dollars = ~ 52 euro = 0.0073 Bitcoin = 0.121 Etherum =28.55 lakh bolivars]
  3. In the beginning, only the citizens of Venezuela can purchase petrol coin, using the currencies mentioned above.
  4. Gradually, we’ll allow international investors can buy.
  5. In the beginning, Petro can be used only for paying government fees and government taxes. [so Venezuelan shopkeepers and private coaching classes can refuse to accept petro coins as payment!]

NCERT Macroeconomics Class12 Chapter3 says:

  1. Fiat money- is the notes/coins issued by law. They don’t have intrinsic value. They have the only guarantee of the government / central bank.
  2. Legal tender– is a fiat money which cannot be refused by any citizen of the country for settlement of any kind of transaction.

So, accordingly, Petro coin is a Fiat money but not a Legal tender at present (because shopkeeper can refuse).

Why Petro coins issued?

  • Both Obama & Trump imposed financial sanctions on Venezuela for human rights violation, drug-trafficking & aiding Hezbollah. So, USA companies can’t buy/invest in Venezuela.
  • Presently, Venezuela facing hyperinflation (13,000% as per IMF), food-riots and weakening of exchange rate. 1 Rupees = 675 Bolivars. 1 USD = 44,000 bolivars.
  • So, President Maduro is trying to solve this by creating a new currency. He’s also planning to launch “Petro-gold” another cryptocurrency linked with Gold.
  • Although, the USA has banned Petro coins as well, due to allegations of Russia having provided the blockchain technology to Venezuela for inventing these coins.
  • Critiques say Petro is neither a true “cryptocurrency made from blockchain technology” nor backed by real oil reserves. This is only a virtual currency- similar to online video games.
  • Petro coin is a fiat money. It is not made up of crude oil or gold, it’s just a digital-code, so has no intrinsic value. The government has not provided the backing that “if you walk in with a petro coin, our Urjit Patel will give you one crude oil barrel from his godown”. So, their “में धारक को * * * * अदा करने का वचन देता हु” non-sense will only mean at maximum 1 petro coin is convertible to 28.55 lakh bolivars (because of the exchange-price-mechanism mentioned for Feb-2018.)

Anyways we need not bother ourselves with these details for MCQs. Even for Mains, it has little relevance because GSM2 says “Issues affecting Indian interests”- How does Venezuelan petro-coin gimmick affect crude prices and Indian economy, whether we should deepen diplomatic ties with them to give tit-for-tat to Donald Trump’s protectionist policies?- इतनी detailed-butterfly-effect-game-theory questions are not asking UPSC. If you pause and ponder at every detail like that, then you will never finish the syllabus.

Marshall Island and SOV (2018, Feb)

Observe नकशा, the map.

  • What is the capital of Australia? Perth, Sydney or Canberra?
  • Does tropic of Capricorn pass through Australia?
  • Hawaii (Capital Honolulu) is not a Sovereign country. It is the 50th state of USA, so think what will be its legal tender? (Ans. USD)
  • Marshall Island (Capital Majuro) is a sovereign country but has “free associated state” relationship with the USA i.e. America will help this island country in Defence, Social Security, and budgetary support.
  • Till now, Marshall Island’s legal tender was US Dollar. But in 2018-February, they launched a sovereign cryptocurrency, called “Digital Sovereign” or SOV. However, unlike BITCOIN wallets, this SOV will not have any anonymity. The accounts will be linked and monitored with whatever PAN/UID type mechanism this country has.
  • So, now Marshall Island has two legal tenders: 1) US Dollars 2) SOV. It means all Financial transactions can be done using either currency, no shopkeeper can refuse to accept.
  • Despite knowledge is sufficient for MCQs. You don’t need to memorize that an Israeli start-up company “NEEMA” Is providing the technological solution for this SOV, they have generated 24 million SOVs, out of the 6 million have been sold to international investors…. etc. because we are not preparing for the MIPSC-CSE. (Marshall Island Public service commission’s civil service exam.)


  • Apart from the cryptocurrency challenges mentioned above, you’ll come across many news items such as- “Coincheck bitcoin crypto currency exchange portal hacked three £ 378 million stolen”, “Exchange giant CME launches bitcoin futures contract (i.e. parties Agreeing to buy or sell bitcoin’s at a specific price on a later date)”…. But such ball by ball commentary is not important for competitive exams. [एस.एस.सी में कोई ‘बिट-कोइन इंस्पेक्टर’ की भरती परीक्षा हो तो बात अलग है…लेकिन एसी कोई भी न्यूज़ फेक-न्यूज़ ही होगी!]
  • With this, I conclude the first part of the budget provision that cryptocurrencies are not legal tender. In the next part, we’ll see what is Blockchain technology? And How can government / RBI  use it for the promotion of digital payment system? And other miscellaneous developments regarding digital payment in India such as UPI 2.0 and MDR subsidy.

Mock question for Prelims

Q. What advantage(s) does bitcoin offer against the fiat paper currency?

  1. Completely safe on the environment since no paper or metal used in creating bitcoins.
  2. Hyperinflation can’t occur in an economy using bitcoins as a mode of payment.


  1. Only 1
  2. Only 2
  3. Both 1 and 2
  4. Neither 1 nor 2

HINT: To replicate the sadism of UPSC examiner, I have deliberately kept first statement open to multiple interpretations. Yes, in the wider-interpretation of the term “environment”, cryptocurrencies are harmful (electricity consumption and e-waste generation). But if the first statement interpreted in the context of only the parameters mentioned (paper/metal not used unlike currency notes and coins) then it could be correct also!?
To repay the war reparation costs under the Treaty of Versailles, German begun to print truckload of money, which led to hyperinflation – a loaf of bread, cost over 200,000 million marks (1923). This is known as ‘Monetary inflation’. In bitcoins, Monetary inflation is not possible because System will not generate more than 21 million bitcoins. However, if there are successive drought years for a decade or complete strike/destruction of industries providing essential medicines? Will there not be hyperinflation by supply-side factors?

Q. Budget-2018 declared cryptocurrencies as not legal tenders in India. What were the primary objectives behind this announcement?

  1. Raise the indirect tax revenue of Govt, which is greatly eroded due to the selling of goods and services in-exchange of bitcoins.
  2. Save gullible investors from Ponzi schemes related to bitcoins.
  3. Stop the use of cryptocurrencies in financing illegitimate activities.

Answer Codes:

  1. Only 1 and 2
  2. Only 2 and 3
  3. Only 1 and 3
  4. All of them

HINT: Have the majority of Indians started using bitcoins instead of rupees to buy soaps and shampoos ke Government is suffering the loss of crores of rupees in GST evasion!!? Dec-2017, Finmin cautioned against Ponzi schemes in cryptocurrencies. Feb-2018, budget itself mentioned #3.

Q. [Actual MCQ in UPSC-2016] Correct statement(s) about ‘Bitcoins’:

  1. Bitcoins are tracked by the Central Banks of the countries.
  2. Anyone with a Bitcoin address can send and receive Bitcoins from anyone else with a Bitcoin address.
  3. Online payments can be sent without either side knowing the identity of the other.

Select the correct answer using the code given below.

  • 1 and 2 only
  • 2 and 3 only
  • 3 only
  • 1, 2 and 3

HINT: First statement is wrong, therefore, A and D are wrong. Then apply common sense: if feature-3 is possible then 2 ought to be right! so, “C:3 only” could not be the answer.
Q. “Oceania” consists of

  1. Australia
  2. Pacific islands
  3. New Zealand

Answer choices

  1. Only 1
  2. Only 1 & 2
  3. Only 2 and 3
  4. 1, 2 and 3.

HINT: NCERT Class8, Ch.6, page7. All three.

Q. One rupee Indian coin is called “limited legal tender” because

  1. Its supply is limited due to a shortage of nickel.
  2. It is not accepted outside India
  3. It cannot be used for payment of financial obligations higher than Rs.1000
  4. None of the above.

HINT: Many such questions can be framed from the theory so Watch the Lecture.