Why has the IMF’s view on the crypto market in Latin America changed? (GS Paper 2, International Organisation)
Why in news?
- Recently, the International Monetary Fund (IMF) issued a statement on the use of cryptocurrency in the Latin American and Caribbean market, and about the rising interest in blockchain-based Central Bank Digital Currencies (CBDCs).
- It ended its statement noting that a ban on crypto “may not be effective in the long run” in the region. IMF’s change in stance on crypto in the LatAm market has raised eyebrows everywhere.
Why is Latin America’s crypto economy so significant?
- Countries like Argentina, Chile, and Columbia have experienced devaluation of their currency against the U.S. dollar.
- To preserve the value of their savings, some residents have explored converting their funds to U.S. dollars. However, there are legal restrictions controlling this.
- Others have chosen to convert their assets to stablecoins, cryptocurrencies designed to reflect the value of fiat currencies such as the U.S dollar. Brazil, Argentina, Colombia, and Ecuador are among the top 20 in Chainalysis’ 2022 Global Crypto Adoption Index.
- Separately, a number of central banks in the Latin American market are considering CBDCs, meaning that more people could soon be exposed to blockchain-based infrastructure.
Why does El Salvador stand out among crypto economies?
- El Salvador is the first country in the world to adopt Bitcoin as its legal tender. The country with a population of 6.5 million adopted Bitcoin on September 7, 2021.
- It uses a digital wallet known as Chivo to regulate users’ crypto transactions. However, there have been complaints about the wallet causing funds to disappear and enabling identity fraud.
- Bitcoin reached an all-time high of over $67,000 in November 2021. During this time, El Salvador’s President made ambitious plans to issue Bitcoin bonds, build a ‘Bitcoin City’ and start the volcanic mining of Bitcoin.
- However, these plans were largely put on hold as Bitcoin suffered multiple crashes through 2022.
- As of now, the country’s Bitcoin investment value is down 26.3% in total. El Salvador’s president also predicted that Bitcoin would reach a value of $1,00,000 by the end of 2022. But the asset has not even come close to its previous high.
How did the IMF react to El Salvador’s Bitcoin adoption?
- The IMF said it was against El Salvador’s move, citing fiscal risks and consumer protection issues. El Salvador was also told that its adoption of Bitcoin might affect its application for a loan of $1.3 billion.
- This is why the IMF’s latest blog post on crypto and CBDC use in Latin America and the Caribbean came as a surprise to many.
- The post also called for regulation of cryptocurrency and recording crypto transactions for transparency.
What is the difference between cryptocurrency and CBDCs?
- Cryptocurrencies and CBDCs are both blockchain-based digital currencies. However, while cryptocurrencies are generally run by private companies or individuals, a CBDC is controlled and tracked by a country’s central bank and corresponds to that country’s fiat currency.
- Bitcoin’s price may vary by hundreds or even thousands of dollars in a short period of time, and its founder is a mystery.
- On the other hand, a CBDC such as the eNaira, issued by the Central Bank of Nigeria, would (ideally) be worth as much as its physical counterpart.
- While investors often buy large quantities of Bitcoin or other cryptocurrencies and hold them in the hope of making a profit, this doesn’t make sense in the case of CBDCs as they are not meant to be investment vehicles.
- The Bahamas in the Caribbean was one of the first countries to officially introduce its Sand Dollar CBDC.
CBDC by China:
- China’s government, meanwhile, has energetically promoted its digital renminbi (e-RMB). Transactions with its CBDC crossed $13.9 billion last year.
- China has however banned crypto mining and unregulated virtual assets in the country, prompting a large section of the mining population to flee to other countries.
The Netherlands’ apology on slavery
(GS Paper 2, International Relation)
Why in news?
- Recently, the king of the Netherlands, Willem-Alexander, apologised for his country’s role in the slavery of colonised people, beginning in the 16th Century.
- He was speaking at a speech marking the 150th anniversary of the abolishment of slavery in Suriname (in South America) and in Dutch colonies in the Caribbean in 1873.
Background:
- Earlier in December 2022, Dutch Prime Minister had also offered a full apology, coming after the results of a government-commissioned study were made public.
- It found that between 1945 and 1949, the Dutch used “excessive violence” in Indonesia after World War 2. While the Dutch had established their presence in the 1600s, it was in the 19th and 20th centuries that they began ruling the country.
- Japan then took control during World War 2, at the end of which the Dutch tried to regain control amid the independence movement taking shape.
What was the Dutch role in the slave trade?
- Like other European maritime nations, the Dutch were quick to involve themselves in the transatlantic slave trade. Between 1596 and 1829, the Dutch transported about half a million Africans across the Atlantic.
- Large numbers were taken to the small islands of Curaçao and St. Eustatius, in the Caribbean. The Dutch also shipped about a half million Africans to their settlements in Dutch Guiana, notably Suriname, where they worked primarily on sugar plantations.
- The Dutch put slaves to work in their coffee, sugar and tobacco plantations, apart from household labour in colonies. The centuries of slave trade funded what is known as the Netherlands’ ‘golden age’, the period roughly between 1585-1670, when trade, arts, sciences and the military flourished in the country.
- When slavery was formally abolished in 1863, it was not the slaves who received compensation from the Dutch state, but the slave owners.
What else is the government doing?
- The government will make €200 million available in a fund for measures aimed at raising awareness, fostering engagement and addressing the present-day effects of slavery.
- July 2023 is being marked as the 150th anniversary of the abolition of slavery, as, while it was formally abolished in 1863, another 10 years were required to put it into practice.
- A criticism frequently levelled at ‘The Netherlands’ is that its school education system does not adequately engage with its colonial and slave trading past. The government said it will “give the Netherlands’ role in the history of slavery a substantial place in education, as this is where young people come into contact with history.”
- Apart from this, the country is also looking at returning artworks looted during the colonial period.
Six years of GST
(GS Paper 3, Economy)
Why in news?
- Recently, India’s Goods and Services Tax (GST) completed six years.
- GST came into effect on 1 July, 2017, overhauling the previous indirect tax regime and subsuming multiple central and state-level taxes within itself.
Details:
- The government also announced the GST collections for June 2023, which came in at Rs 1.61 lakh crore, the third highest since the indirect tax was implemented.
- The taxation experts say that while revenue from the indirect tax system has been growing robustly, there is a need for a few urgent reforms.
- These include easing the process by which people can appeal against orders by tax authorities, and bringing in at least some petroleum products within the ambit of GST.
Robust growth in revenue:
- Analysis of the government’s GST collections show that the average amount earned every month has been increasing,even during the pandemic year of 2020-21.
- For example, the government collected an average of Rs 89,885 crore every month in 2017-18 (starting from July 2017, when GST started). This rose to Rs 1 lakh crore of average monthly collections in the pre-pandemic year of 2019-20.
- While the COVID-19 pandemic certainly dented GST collections in the first few months of the lockdown, revenue bounced back quickly as the economy opened up. Average monthly collections in 2020-21 were Rs 1.08 lakh crore, higher than the pre-pandemic period.
- For 2022-23, average monthly GST collections stood at a healthy Rs 1.5 lakh crore, government data shows.
- The current financial year of 2023-24, set off to a great start, with the highest ever collections of Rs 1.87 lakh crore coming in the first month itself.
Impact in states:
- However, while the overall collections look to have grown robustly, it’s not entirely clear whether the states have fared better under GST as compared to the previous regime.
- Tax experts attribute this to the nature of the previous regime, under which each state had a different rate of Value Added Tax (VAT) for different items. Further, since fuel is not included in GST, revenue from its sale further complicates the comparison.
- Prior to the implementation of GST, the Modi government had promised states compensation for any losses of revenue on account of the implementation of GST.
- This compensation was to be for five years, and the assumption was that states would have seen their revenue grow by 14 percent every year. If their revenue growth was less than this, the central government had promised to reimburse the difference.
- Data from the Reserve Bank of India, shows that the latter’s revenues from GST (both state GST as well as their share of central GST) has grown at a compounded annual rate of just 7.8 percent, nearly half of the predicted rate.
Urgent reforms needed:
Setting up Tribunals:
- The GST law has a provision for the setting up of tribunals, so that taxpayers have a place to appeal an order by the tax authorities.
- At the moment, six years after GST has been in effect, there are no tribunals and so taxpayers have to approach high courts, which is a lengthy and resource-intensive process.
Dispute redressal:
- This is also the right time for the GST Council to engage with all stakeholders and undertake a comprehensive legislative and administrative review of GST to reduce disputes and further simplify the laws.
- Sectoral committees can be formed to discuss and address the sector specific concerns specifically the new age segments such as e-commerce, crypto currencies, etc.
Bringing in at least some petroleum products within the ambit of GST:
- The other major issue that needs urgent attention is the treatment of fuels under GST.
- The Central Goods and Services Tax Act, 2017 says that central tax on the supply of petroleum crude, high-speed diesel, motor spirit (commonly known as petrol), natural gas and aviation turbine fuel shall be levied with effect from such date as may be notified by the government on the recommendations of the Council.
- The taxation of petrol and diesel are controversial topics because they are the few items left under states’ control to tax and have been a sore point ever since the implementation of GST.
