Bitcoin: What the Central Banks Don’t Track

1.1 Which Bitcoin claims are correct?

The 2016 question gave three statements about Bitcoins. Statement 1 said central banks track Bitcoins. Statement 2 said anyone with a Bitcoin address can send and receive Bitcoins from anyone else with an address. Statement 3 said online payments can be sent without either side knowing the other’s identity.

Statements 2 and 3 are correct. Statement 1 is not. The official Series A key lists option B for Question 66, which is 2 and 3 only.

1.2 How do you remember the three claims?

• Claim 1 fails: Bitcoin is not authorised by any central bank. The RBI said so in 2013.
• Claim 2 holds: an address is all you need to give to be paid.
• Claim 3 holds: payments use addresses, not names.

A common mistake is to read “not tracked by central banks” as “not tracked at all”. Card 2 clears this up.

2.1 Does a central bank issue or track Bitcoin?

No. The RBI press release of 24 December 2013 covers virtual currencies, including Bitcoins. It says their creation, trading or use as a medium for payment is not authorised by any central bank or monetary authority.

The same release says payments take place on a peer-to-peer basis. There is no authorised central agency that regulates them. Peer-to-peer means the payment goes straight between two parties.

2.2 Who records each payment instead?

Bitcoin.org says the blockchain is a public record of Bitcoin transactions in chronological order. It is shared between all Bitcoin users.

The Supreme Court judgment of 4 March 2020 quotes writer Nathaniel Popper on this point. He describes a system where every transaction is tracked and recorded by the computers of all the people using the digital money. It does not rely on a central bank or company to issue and keep track of the money.

Picture a village notice board that every villager can read and copy. No single office owns the record. This is only an analogy.

2.3 Is "not tracked by a central bank" the same as "not tracked at all"?

No. Bitcoin.org says all Bitcoin transactions are public, traceable and permanently stored in the Bitcoin network. What is missing is a central bank or any single authority doing the tracking.

The white paper explains why it was designed this way. It says Internet commerce had come to rely almost exclusively on financial institutions as trusted third parties to process electronic payments.

3.1 What is a Bitcoin address?

Bitcoin.org says an address is similar to a physical address or an email address. It is the only information you need to give someone so they can pay you with Bitcoin.

The Supreme Court judgment quotes Popper describing addresses as “sort of like bank account numbers”. Each address comes with a private key.

3.2 How does anyone pay anyone else?

The white paper abstract says a purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another. No financial institution sits in between.

• Address: tells the network where bitcoins are sent.
• Wallet: holds your private keys and lets you pay a specific amount to a specific person.
• Private key: a secret piece of data that proves your right to spend bitcoins from a wallet.

3.3 Is an address exactly like a bank account number?

Not quite. Bitcoin.org says an address should ideally be used only once to receive funds. It also says private keys must never be revealed, because they allow others to spend your bitcoins.

4.1 Can a payment be sent without knowing who is on the other side?

Yes, in the sense the exam uses. The white paper section on privacy says privacy is kept by keeping public keys anonymous. The public can see that someone is sending an amount to someone else. There is no information linking the transaction to anyone.

The white paper compares this to a stock exchange. The time and size of trades are public, but the parties are not named.

4.2 Why is the better word pseudonymous?

A pseudonym is a made-up label used in place of a real name. A Bitcoin address plays that role. The RBI release of 24 December 2013 itself calls these systems “anonymous/ pseudonymous”.

Bitcoin.org is clear that Bitcoin is not anonymous. Its FAQ says Bitcoin cannot offer the same level of privacy as cash and leaves extensive public records.

• Visible to anyone: the balance and all transactions of any address.
• Not shown by the address alone: the name of the person who controls it.
• The risk: once addresses are used, they become tainted by the history of all transactions they are involved with, says Bitcoin.org.

4.3 What does the white paper say about linking?

It advises a new key pair for each transaction so they are not linked to a common owner. Some linking is still unavoidable with multi-input transactions. If the owner of a key is revealed, linking could reveal other transactions of the same owner.

5.1 What is Bitcoin mining?

Bitcoin.org defines mining as making computer hardware do mathematical calculations for the Bitcoin network. These calculations confirm transactions and increase security.

Miners are rewarded. They can collect transaction fees for the transactions they confirm. They also receive newly created bitcoins issued through the block subsidy. The subsidy is reduced at each halving.

5.2 How does a payment get confirmed?

Anybody can become a miner by running software with specialized hardware. A payment is broadcast through the peer-to-peer network. Miners include it in a block along with a mathematical proof of work.

These proofs are very hard to generate. Bitcoin.org says new blocks are added approximately every 10 minutes on average. The network raises the difficulty automatically to keep that average.

5.3 Who controls Bitcoin, and how many bitcoins can exist?

Bitcoin.org says nobody owns the Bitcoin network, much like no one owns the technology behind email. Every node rejects anything that breaks the rules it expects.

• New bitcoins are created at a decreasing and predictable rate.
• Issuance halts when a total of 21 million bitcoins exist.
• One bitcoin divides into 100,000,000 satoshis, up to 8 decimal places.

6.1 Why is it hard for governments to decide?

Bitcoin.org says regulation differs significantly from country to country and continues to evolve. In the 2020 judgment, the Supreme Court noted that the Government of India was unable to take a call. Several committees had come up with proposals, including two draft bills with opposite positions.

6.2 What happened, step by step?

The table lists the dated steps in the sources read for this article. Each row says what that body said at that date.

Rows cover only these five dated items. Later notices are not shown. Rules change, so check the current RBI, Finance Ministry, PIB and Income Tax Department pages. The 2022 row is a proposal made in a speech, not the text of the law.

The 2018 circular named a three-month exit period and listed services such as maintaining accounts, trading, settling, clearing and giving loans against virtual tokens.

6.3 Did the RBI ban Bitcoin?

The judgment records that the consistent stand of the RBI was that it had not banned virtual currencies. The 2018 circular restricted RBI-regulated entities. The Court set that circular aside in 2020.

The judgment also records two statements on legal status. A Ministry of Finance statement of 29 December 2017 said virtual currencies are not recognised as legal tender. The Budget speech of 1 February 2018 said the Government did not consider crypto currencies legal tender or coin.

6.4 How is the Digital Rupee different from Bitcoin?

The Budget speech of 1 February 2022 proposed a Digital Rupee, to be issued by the RBI starting 2022-23. The RBI’s Concept Note of 7 October 2022 gives a definition. A central bank digital currency is legal tender issued by a central bank in a digital form.

The table covers only these three points. It does not cover prices or other crypto assets. The Digital Rupee row reflects the RBI note of October 2022.

7.1 What did UPSC ask?

UPSC asked which of three statements about Bitcoins are correct. It appeared in the Civil Services (Preliminary) Examination 2016, General Studies Paper I, as Question 66. The official Series A answer key lists option B for Question 66.

See UPSC CSP 2016 GS Paper I, Q66. View this question.

7.2 How do you reach the answer step by step?

• Step 1: test statement 1. No central bank authorises Bitcoin, so it fails. This removes options (a) and (d).
• Step 2: test statement 2. An address is all you need to be paid, so it holds. This removes option (c).
• Step 3: statement 3 holds too, because addresses stand in for names. Pick option (b), 2 and 3 only.

7.3 Quick Q&A