CRYPTO-CURRENCIES AND THE LAW. What Does The World’s Embracing Of Crypto-Currencies Mean For Uganda And Other Developing Countries?

 

Introduction.

From using Barter trade to Cowrie shells, to the Indian rupees in the 1800s, to the East African currency, the Ugandan economy has taken a slow but surely formidable turn in the evolution of its currency. Since Uganda attained her independence in the year 1962, the then newly issued Uganda Shillings Currency (UGX) could only give one a glance at what would come in the future with the newly created Bank of Uganda its custodian.

With almost all political regimes that the country has experienced, majority if not all regimes have adopted a modus operandi that has seen the Uganda shillings go through a robust series of evolution depending on what that specific regime desires until the year 2013 when the 1987 series ceased to be legal tender.

The most salient feature about the Ugandan currency is the fact that it is centralized and can only be issued and regulated by the state, through its organs and in this case being the Bank of Uganda which is Uganda’s central bank.

Aside from the various services that traditional banks offer including but not limited to digital transactions, the period after the 2008 global economic crisis gave birth to many but a million challenges and opportunities. Among these was the emergency of the Blockchain technology that allows and runs the operation of crypto currencies in the fall of 2009.

The emergency of the Block chain technology has taken a more robust shift in as far as economic evolution is concerned. It is estimated that over 1583 crypto currencies have since the emergency of the Block chain technology come up and are being used in daily transactions albeit lacking any regulatory framework.[1] These include Bitcoin, Litecoin, Ethereum, Tether, BNB, Dodge Coin to name but a few. It is equally estimated that over 300 million people have to date been involved in crypto-currency transactions.

Since Crypto-currencies are a new spectrum of economics, it is barely regulated by most countries in the word however, a number of countries have in the past expressed their willingness in embracing digital currencies and hence creating a need for regulation. These include; like El-Salvador, Malta, Nigeria, South Africa, Kenya, USA among others

What then does this mean for Uganda and how can Uganda interest herself in the rapidly growing Crypto eco-system.[2]

What is Crypto-Currency?

For many, this won’t probably be the first time to hear about it but to hear about and understand are two different things.

Crypto-currencies or Virtual Currencies as many referred to them have been defined as a digital representation of value that functions as a medium of exchange or a store of value. The European Banking Authority defines Virtual Currencies as “a digital representation of value that is neither issued by a central bank or a public authority, nor necessarily attached to a [fiat currency].[3]

 

Just like the cash me and you use at the mall, or your favorite local store to buy groceries, Virtual currencies or digital currencies are accepted by natural or legal persons as a means of payment for goods and services and can be transferred, stored or traded electronically.

 

One of the main salient features of crypto currency is that the system is decentralized or in other words, the system is not centrally controlled by any one individual, bank, institution, or government.

 

The transactions are made by account holders and the interaction is strictly peer to peer with no intermediaries.  The accounts are anonymous and although the transactions are transparent in that account holders can see the transactions on the ledger, one cannot know who they’re transacting with at the other end.

 

As noted earlier, there are a number of crypto currencies that are in operation and these include Bitcoin, Ethereum, Lite coin, Ether, Dodge Coin, Z-cash, Stellar Lumen to mention but a few. This has seen a number of multi-million companies and investments add Crypto-currencies as one of the main payment mechanisms. For example, companies such as Rakuten, Twitch, AMC, Microsoft, PayPal among others have since added a medium through which one can pay for their services using Crypto-currencies.[4] In Uganda, payment platforms such as Binance are used to pay for services and products using Bitcoin.

 

As such, the current crypto landscape and ecosystem must be considered to be more than just an evolution of an electronic payment system but a major economic player that has the potential of changing the world of transactions. The fact that it has diversified from the initial intended function of transferring coins between peers. Crypto and blockchain technology is now becoming a major disruptor of how our economy and our society functions and indeed given us a glance and what the future holds.

 

How do Virtual Currencies “Crypto-Currencies” operate?

The government of Uganda through its ministry of Finance released a press statement in 2016 commenting on the emergency of Crypto-currencies in the Ugandan market. The government while acknowledging that Crypto-currencies are digital assets that are designed to effect electronic payments without the participation of a central authority or intermediary such as a Central Bank or licensed financial institution, notified Ugandans that these are not a legal tender.[5]

 

The government of Uganda (GOU) like many other governments feared that the volatile nature of the Crypto-currencies and their other features would be a dangerous risk for Ugandans to partake in.

 

In the statement, the GOU warned that unlike other owners of financial assets who are protected by Government regulation, holders of crypto-currencies in Uganda do not enjoy any consumer protection should they lose the value assigned to their holdings of crypto-currencies, or should organization facilitating the use, holding or trading of crypto-currencies fail for whatever reason to deliver the services or value they have promised.

 

As noted earlier, the high volatility rates of the Crypto rates mean that the currencies are not stable and their prices change with the change of different situations. For example, the prices of Dodge Coin doubled up in 2021 when Elon Musk announced that he would invest in it. Another situation will happen and the prices will drastically fall.

 

Whereas it is true that the Crypto-ecosystem clothes itself with the utmost uncertainty of how secure your investments are due to the lack of regulation, we cannot ignore the fact that as a medium of payment and property, people across the world are using it and it is rapidly impacting the operation of global economic markets.

 

Thus, is it therefore pertinent for the Ugandan government and other developing governments to invest in studying how best they can regulate the Crypto-arena, harness and incorporate it into their economic and financial systems.

 

 What are some of the Key features Crypto-currency?

The most salient of features of Crypto-currency are what actually double up as the causes of fear amongst developing countries when it comes to the adoption of Crypto-currency. These are briefly explained below; -

 

1.    Decentralization.

As earlier noted on, there is no individual, government, bank, institution or organ that governs or regulates crypto currencies. The transactions and interactions are strictly peer to peer and there is no intermediary in between. The transactions are kept in one main ledger that contains the transactions that have ever taken place on Blockchain different from banks which keep individual ledgers for their entities.

 

2.   Anonymity of transactions.

The transactions that take place on Blockchain cannot be imputed on any specific individual. The system works in an algorithmic form and does not display who one is dealing with, but rather displays that a certain transaction has taken place between two different people. There are although fears that this specific feature may further the commission of crimes since individuals can be able to move money to facilitate crime without being traced. Also, money laundering has been a major fear among a number of states.

3.   The Crypto-currencies prices are volatile.

As noted hereinabove, crypto-currencies unlike the conventional bills of exchange have no real value. Their prices can be determined by anything that happens be it war, political climate or social factors. For example, Bitcoin, the world's oldest and most popular cryptocurrency, rose to all-time highs since the beginning of 2021, before plummeting and losing a huge amount of its value thereafter in the same year.

 

Why Uganda and other East African countries need to embrace FinTech in this case Crypto-currency and nurture it through establishing a workable legal and policy framework?

 

“The introduction and potential proliferation of private virtual currencies might, in one view, threaten to erode the demand for central bank money and the transmission mechanism of monetary policy. A Central Bank Digital Currency (CBDC) may forestall such private virtual currencies or relegate them to a secondary role in the payments system. This threat is not imminent given the current transactions domain and limitations of existing private virtual currencies and their likely medium-term growth. Stability and safety considerations connected to this proliferation may, however, be relevant in the medium run but could presumably be dealt with by other measures.”[6]

The emergency into the market of Crypto-currencies should not at all be viewed only as a threat but also an opportunity which ought to be exploited by the governments. Once well regulated, Crypto-currencies offer one of the most efficient ways of carrying out electronic transactions.

 

Considering the fact that most areas except urban areas in East Africa are still unbanked or underbanked, crypto-currencies offer a medium where the unbanked or underbanked can access financial services including, trading online (i.e., investing in stock), buying and selling properties, payment services among others. In the long run, this would increase the number of people who are financially included and thus achieving the SDG goal of financial inclusion for all.

 

In regulating the Crypto-currencies, the governments will focus on structuring them as either currencies, properties (capable of being taxed), bill of exchange or promissory notes whichever they zero down to lest we risk having more and more unregulated transactions happening behind our backs while living in the shadows of ignorance.

There are other reasons why governments need to embrace, intervene and regulate these transactions. These include; -

      i.      To protect investors

Since we’ve already seen that the market and the prices of Crypto-currencies are volatile, there is need to have certainty in the rates and or prices so that investors feel more secure to invest their money.[7] Once investors are secure, then its sure common knowledge that they will be willing to invest even more money in the Crypto-arena. This will also protect investors from the bursts in the prices that have seen many lose millions of dollars over time.

     ii.      Determine which Crypto-currencies to allow

Currently, there are over 1586 crypto-currencies out there that people transact with.[8] The governments need to identify which ones work well for their people. The lack of information about all these crypto-currencies mean that people are likely to lose money wile transacting with a less credible crypto-currency.

 

    iii.      Online fraud and cyber security risks

 Online risks such as cyber-attacks, fraud and hacking are major risks or threats for any online transactions that happen worldwide. One cyber-attack could result in losses for investors who have put their savings in cryptocurrencies. Through regulations, governments can implement measures to help cryptocurrency investors protect their assets.

    iv.      Money Laundering

As mentioned before, the fact that the transactions that take place on Blockchain remain anonymous means that criminal activities such as money laundering could take place and remain unnoticed. Through regulation, governments would put in measures to counter this vice.

 

Conclusion.

We have seen that in as much as governments have distanced themselves from the operations of Crypto-currencies, their existence and later impact in the global economic and financial systems can not be ignored. The challenge that many African countries is facing is failure to adopt newer technology and merely see it as a threat to what is already existing.

The new-normal that has been ushered in by the Covid-19 pandemic dictates that we ought to evolve in the way we did things before and adopt a more technological lifestyle. Who knew one would sit in their bed and still attend a work meeting via zoom? Similarly, a time is coming when one will not need to go to bank to access financial services, to buy a house in LA, to invest in stock and later reap benefits by just using a phone and internet connection.

The fact is that once these Crypto-currencies are regulated they will offer a more of decentralized banking system but still over seen by the central bank. This would then foster the increase in the number of people who are financially included.

 

If left unregulated, Crypto-currencies will remain a smooth medium through which illegal activities such as money laundering take place and this will in the end have dire consequences on the economy. If left unregulated, the Crypto-currencies will also expose Ugandans to a market where once the balloon bursts and people lose all their investments or savings, the consequences will be rather heartfelt. 

 

The writer is a lawyer and Crypto enthusiast

MUGABI HORACE

mugabi@lawyer.co.ug

Tel: +256786400697

Kasirye, Byaruhanga & Co. Advocates.

References

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[1] https://coinmarketcap.com/ accessed on 3/12^th /2022

[2] The blockchain ecosystem is a network of participants in a blockchain that share business objectives and processes

[3] European Central Bank “Virtual Currency Schemes” (2014)

[4] Bitcoin engineered Bitpay is one of the effective platforms for paying using Bitcoin

[5] https://www.finance.go.ug/sites/default/files/press/statement%20on%20crypto%20currency.pdf accessed on 12^th March 2022

[6]IMF “Fintech and Financial Services: Initial Considerations (2017)”

[7] Why crypto-currencies need to be regulated, accessed at https://www.ndtv.com/business/5-reasons-why-cryptocurrency-regulation-is-important-2637741 on 3rd-March-2022

[8] https://coinmarketcap.com/ accessed on 3/12^th /2022