CAO Daily Editorial analysis for UPSC IAS 09th-January, 2018

Current Affairs Only Daily Editorial Analysis for Competitive Exams

09th Jan, 2018


The age of crypto-economics {Digital Economy}

Why in news?

The Finance Ministry recently issued a statement warning against investing in bitcoin and other cryptocurrencies (CCs).
Likening CCs to ‘Ponzi schemes’, it linked them to terror-funding, smuggling, drug-trafficking, and money-laundering.

Why the distrust?

Aspects of the bitcoin phenomenon have attracted great interest

• The challenge it poses to states and central banks.
• The potential of its underlying technology to unleash a new wave of creative destruction.
 World’s top central bankers have finally realised the futility of trying to control CCs. They are preparing to join them — by issuing their own Central Bank Digital Currency (CBDCs).

Central Bank Digital Currency (CBDCs)

  • Central bank digital currency (CBDC) (also called “Digital Fiat Currency” or “digital base money“) is the digital form of fiat money which is a currency established as money by government regulation or law.
  • Central bank digital currency is different from “digital currency” (or virtual currency and cryptocurrency), which are not issued by the state and lack the legal tender status declared by the government. As such, public digital currencies could compete with commercial bank deposits and challenge the status quo of the current fractional reserve banking system

Benefits and Impacts

Digital fiat currency is currently being studied and tested by governments and central banks in order to realize the many positive implications it contributes to financial inclusion, economic growth, technology innovation and increased transaction efficiencies.
Safety of payments systems: A secure and standard interoperable digital payment instrument issued and governed by a Central Bank and used as the national digital payment instruments boost confidence in privately controlled money systems and increase trust in the entire national payment system while also boosting competition in payment systems.
• Protection of money as a public utility: digital currencies issued by central banks would provide a modern alternative to physical cash – whose abolition is currently being envisaged.
Preservation of seigniorage income: public digital currency issuance would avoid a predictable reduction of seignior age income for governments in the event of a disparition of physical cash.
Financial inclusion: safe money accounts at the central banks could constitute a strong instrument of financial inclusion, allowing any legal resident or citizen to be provided with a free or low-cost basic bank account;
Technological efficiency: instead of relying on intermediaries such as banks and clearing houses, money transfers and payments could be made in real time, directly from the payer to the payee.
Banking competition: the provision of free bank accounts at the central bank offering complete safety of money deposits could strengthen competition between banks to attract bank deposits, for example by offering once again remunerated sight deposits.
Monetary policy transmission: the issuance of central bank base money through transfers to the public could constitute a new channel for monetary policy transmission (ie. helicopter money), which would allow more direct control of the money supply than indirect tools such as quantitative easing and interest rates, and possibly lead the way towards a full reserve banking system.
Financial safety: CBDC would limit the practice of fractional reserve banking and potentially render deposit guarantee schemes less needed.


A general concern is that the introduction of a CBDC would precipitate potential bank runs  and thus make banks’ funding position weaker.


In order to be functional, a virtual currency must solve the problem of double spending.
Given that anything digital can be copied, how do you prevent someone from spending the same unit of currency twice?


Nakamoto solved the double spending problem by designing a decentralised ledger that bundles data about transactions into blocks, timestamps them, and links each new block of transactions with the previous one in an immutable chain of blocks that are copied, authenticated, and updated continuously, and publicly, on thousands of computers — the blockchain.

Contested history {Indian Politics}

(The Hindu)


Relations of the Government with the Hill Tribes of the North-East Frontier of Bengal.
Alexander Mackenzie’s monumental work, History of the Relations of the Government with the Hill Tribes of the North-East Frontier of Bengal , first published in 1884

Lushai Expedition

The British Indian Army Lushai Expedition of 1871 to 1872 was a punitive incursion under the command of Generals Brownlow and Bourchier.


To rescue British subjects who had been captured by the Lushais in raids into Assam—including a six-year-old girl called Mary Winchester—and to convince the hill tribes of the region that they had nothing to gain and everything to lose by placing themselves in a hostile position towards the British Government.
For the British, the expedition was a success: the prisoners were freed and the hill tribes agreed to negotiated peace terms. The border region was to remain peaceful until 1888 when large scaled raiding was resumed and another punitive expedition was organised.
After turning the Burmese out of Assam during the First Anglo-Burmese War in 1824, the Bengal Government of the East India Company attempted to administer all that was not absolutely necessary for the control of the frontier through Purandar Singha a native prince; this arrangement failed, and Assam became a non-regulation province in 1838. On its southern borders lay the Lushais, the principal tribes known to Assam being Thadoe and Poitoo Kukies. For many years, long before the British occupation, the inhabitants of the plains to the south had lived in dread of the Kukies, who used to come down and attack the villages, massacring the inhabitants, taking their heads, and plundering and burning their houses.

Boundary modifications

  • In 1834, when the boundary of Manipur was redrawn to gift the disputed Kabaw valley to Burma, Chassad-Kuki settlements were left neither in Manipur nor Burma.
  • This 1834 line came to be known as the Pemberton Line, after Capt. R. Boileau Pemberton who drew it along the foot of “Muring hills” (British records), indicating that these hills were once the domain of the Maring Nagas.
  •  The boundary was redrawn to bring Chassad within Manipur and this brought peace. The boundary became the Pemberton-Johnstone Line after Col. James Johnstone, head of the 1881 boundary commission. Burma was invited but failed to turn up.
  • This boundary was modified again in 1896 and thereafter came to be known as the Pemberton-Johnstone-Maxwell Line. This is the line ratified by the Rangoon Agreement of 1967 between India and Burma. The 1834 line is India’s earliest demarcated international boundary.

Behavioural economics needs a unifying theory {Economy}



Economics models are mathematical in nature, and representing the full complexity of human behaviour with math would make models unwieldy


  • Behavioural ideas are difficult to put into economic models. For one thing, many psychological biases and irrationalities involve people behaving in very complex, situation-dependent ways. Economics models are mathematical in nature, and representing the full complexity of human behaviour with math would make models unwieldy.
  • A second problem is that drawing too many different insights can lead to a problem called overfitting.


  • Enter Xavier Gabaix. The French-born Harvard professor has been on somewhat of a mission to incorporate behavioural economics into the mainstream.
  • Gabaix’s unified theory is based on limited human attention. Standard economic theory requires that consumers and businesspeople pay close attention to a vast array of prices, quantities and other information.


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