Q. With reference to 'Bitcoins', sometimes seen in the news, which of the following statements is/are correct? - Bitcoins are tracked by the Central Banks of the countries.
- Anyone with a Bitcoin address can send and receive Bitcoins from anyone else with a Bitcoin address.
- Online payments can be sent without either side knowing the identity of the other.
Select the correct answer using the code given below. (UPSC Prelims 2016)
Answer:
2 and 3 only
Notes: The correct answer is
[B] 2 and 3 only. 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.
- Tracking by Central Banks (Statement 1 – Incorrect): Bitcoin is a decentralized cryptocurrency. It operates on a distributed ledger technology called Blockchain. Unlike fiat currencies (like the Rupee or Dollar), Bitcoins are not issued, regulated, or tracked by any Central Bank (like the RBI or Federal Reserve). This independence from central authorities is a core feature of its design.
- Peer-to-Peer Transactions (Statement 2 – Correct): The Bitcoin network is open and permissionless. Anyone can generate a Bitcoin address (a digital wallet) using various software tools. Once an address is created, the user can send or receive Bitcoins from any other address globally without needing a middleman or financial institution.
- Anonymity/Pseudonymity (Statement 3 – Correct): Bitcoin transactions are "pseudonymous." While every transaction is recorded publicly on the blockchain, the real-world identities of the sender and receiver are not required. A user is identified only by their public key or Bitcoin address, allowing payments to be sent without either party necessarily knowing the other's legal identity.
- Mechanism: Transactions are verified by network nodes through cryptography and recorded in a public distributed ledger. This process is maintained through "mining," where participants use computing power to secure the network.