Nowadays, 'nonfungible tokens' are talked about in the context of

Q: What is the answer to CAPF 2022 Paper I Q93?

A. Correct — A, digital assets on a blockchain. A non-fungible token is a unique cryptographic record on a blockchain that certifies ownership of a specific digital item — artwork, music, a clip, an in-game object — or tokenises a claim over a physical one. Fungible means interchangeable, as one rupee note is for another; non-fungible means each token is distinct and cannot be swapped one for one, which is exactly what makes it useful as a certificate of ownership. Nothing in the other three options involves a blockchain at all.

(a)digital assets on a blockchain
(b)operations of 'banking correspondents' in rural areas
(c)multifactor authentication security requirement in banking transactions
(d)transactions through 'small finance banks'

Answer

Why

Correct — A, digital assets on a blockchain. A non-fungible token is a unique cryptographic record on a blockchain that certifies ownership of a specific digital item — artwork, music, a clip, an in-game object — or tokenises a claim over a physical one. Fungible means interchangeable, as one rupee note is for another; non-fungible means each token is distinct and cannot be swapped one for one, which is exactly what makes it useful as a certificate of ownership. Nothing in the other three options involves a blockchain at all.

Why the others are wrong

(b)operations of 'banking correspondents' in rural areas — Business correspondents are individuals or entities that banks engage to deliver services in unbanked areas — a financial-inclusion arrangement supervised by the Reserve Bank, with no token or ledger involved.
(c)multifactor authentication security requirement in banking transactions — Multifactor authentication means proving identity with two or more independent factors, such as a password plus a one-time code. It is a security control, not an asset.
(d)transactions through 'small finance banks' — Small finance banks are a category of scheduled bank licensed by the Reserve Bank to serve small borrowers, unorganised-sector workers and micro enterprises. They are institutions, not digital tokens.

Concept

A blockchain is a distributed ledger that many parties can inspect and no single party controls. Cryptocurrencies live on it as fungible units — one bitcoin equals another. A non-fungible token uses the same ledger to record something that is not interchangeable, each token carrying its own identifier and its own transaction history, so ownership can be traced back to the first issue.

The market for these tokens peaked in 2021 and early 2022, which is why the question calls them something talked about 'nowadays' and why the same subject reached the civil services prelims of that year. Value collapsed afterwards, but the underlying idea — a ledger entry that is unique rather than interchangeable — has outlasted the market and now shows up in ticketing, land records and certification proposals.

Key facts

Fungible means one unit is interchangeable with another; a non-fungible token is unique by design.
The tokens sit on a blockchain, most commonly Ethereum, which carries the ownership record.
Buying a token is not the same as buying copyright in the underlying work.
India taxes income from virtual digital assets at a flat rate under provisions introduced in the 2022-23 Budget.

Fungible against non-fungible, on the same ledger

Fungible token→Every unit identical and interchangeable — one bitcoin for another, one rupee note for another. Good for money.

Non-fungible token→Each token carries a unique identifier and its own history, so it can stand for one specific item. Good for proof of ownership.

What is actually owned→The ledger entry pointing at the item, not necessarily the item or its copyright.

The whole answer sits in the word 'fungible'.

Study next

Blockchain and distributed ledger technology beyond currencyCentral Bank Digital Currency and the digital rupeeTaxation of virtual digital assets in IndiaSmart contracts and their proposed uses in land and supply-chain recordsCryptocurrency regulation and the Reserve Bank's position

Common traps

Equating these tokens with cryptocurrency; the point of difference is that they are not interchangeable.
Assuming ownership of the token transfers copyright in the underlying work.

As a definition item, or through statements about what these tokens can and cannot represent.

Related PYQs

UPSC_2022_GS1_Q692022Open & attempt →

With reference to Non-Fungible Tokens (NFTs), consider the following statements: 1. They enable the digital representation of physical assets. 2. They are unique cryptographic tokens that exist on a blockchain. 3. They can be traded or exchanged at equivalency and therefore can be used as a medium of commercial transactions. Which of the statements given above are correct?

(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3

Answer(a) 1 and 2 only

The civil services prelims of the same year, on the same subject and in more detail. Its third statement — that these tokens can be traded at equivalency and used as a medium of commercial transaction — is false for precisely the reason this CAPF item turns on.

Practice

practice — not a real PYQ
The word 'fungible' in the term non-fungible token means
- (a)encrypted
- (b)interchangeable
- (c)transferable
- (d)divisible
Answer(b) interchangeable — a fungible unit can be swapped one for another, and a non-fungible one cannot.
practice — not a real PYQ
Which of the following is a correct statement about blockchain technology?
- (a)It is a public ledger that everyone can inspect but no single user controls
- (b)It can hold data about cryptocurrency only
- (c)It requires a central authority to validate every entry
- (d)Entries once made can be freely edited by the issuer
Answer(a) It is a public ledger that everyone can inspect but no single user controls — the ledger can carry any kind of record, not currency alone.