Demystifying the future of money: Regulation of Cryptocurrencies in Uganda
…. the whole purpose behind cryptocurrencies is to create an item of tradeable value not simply to record or to impart in confidence or information.” – New Zealand High Court in Ruscoe & Moore v Cryptopia Ltd CIV-2019-409-000544
Cryptocurrencies are systems that allow for secure payments online which are denominated in terms of virtual “tokens”.
Crypto” refers to the various encryption algorithms and cryptographic techniques that safeguard these entries, such as elliptical curve encryption, public-private key pairs, and hashing functions.
Crypto-currency is therefore a form of payment that can be exchanged online for goods and services. Cryptocurrencies use a system which is peer to peer verified by network nodes and recorded in a public distributed ledger called a blockchain.
Crypto-currencies can be used to pay for goods and services, as well as for investing in some areas around the world. In this respect, they are similar to physical currencies.
However, unlike fiat money, cryptocurrencies have no physical form, they have not been declared to be legal tender in Uganda and other countries like the United States, and the vast majority are not backed by a government or legal entity.
Inotherwords, the supply of a cryptocurrency is not determined by any central bank. Therefore, users participate in transactions directly without the involvement of any intermediary, which for fiat money, would typically be a bank.
It should be noted that while crypto-currencies may be used legally in many countries, there are others that hold transacting in crypto-currencies to be restricted and still others to be illegal and may result in jail sentences for those doing so.
Crypto-currencies are not cash because they are not legal tender and are not backed by a government or other legal entity.
The New Zealand High Court in Ruscoe & Moore v Cryptopia Ltd CIV-2019-409-000544 delivered in May 2020, held that crypto currencies are digital assets and subsequently a form of property that are capable of being held on trust.
The decision is important as one of only a few currently in the common law world to address expressly the question, in a fully reasoned judgement, as to whether digital assets such as cryptocurrencies constitute property and can be the subject of a trust and because it also addresses the difference between pure information and digital assets in terms of characterization as property.
This is an issue of significance in areas going beyond the realm of cryptocurrencies and distributed ledger technology for example in relation to ownership of machine generated data created by Artificial Intelligence and the Internet of Things.
Furthermore, law makers in El Salvador approved a law classifying Bitcoin as legal tender, making it the first nation to officially recognize a cryptocurrency.
The president announced that this was a way of encouraging foreign investment in the country, saying at the time that if just 1% of the world’s Bitcoin were to be invested in the country, it would increase the country’s GDP by 25%.
Uganda does not officially recognize cryptocurrencies as a form of currency but does not expressly prohibit them in the Ugandan market as digital assets.
Section 4(2) (c) of the Bank of Uganda Act gives mandate to the Central bank to issue currency notes and coins. The unit of the currency is in shillings.
Currency of Uganda means banknotes and coins issued by the Bank of Uganda; and any right to receive such banknotes or coins in respect of any balance at a financial institution located within or outside Uganda according to the Foreign Exchange Act of 2004.
The law in Uganda does not prohibit transactions in other currencies as provided under section 17(2) of the Act to the effect that all monetary obligations or transactions shall be expressed, recorded and settled in the shilling unless otherwise provided under any enactment or is lawfully agreed to between the parties to an agreement under any lawful obligation.
This provision infers that parties may agree to transact using any other currency and this may include cryptocurrencies since the law does not specifically prohibit their use, where a foreign country recognizes cryptocurrency as currency.
According to the Foreign Exchange (Forex bureaus and money remittance) Regulations 2006, regulation 3 defines foreign exchange as banknotes, coins or electronic units of payment in any currency other than the currency of Uganda which are or have been legal tender outside Uganda; financial instruments denominated in foreign currency; and any right to receive such banknotes or coins in respect of any balance at a financial institution located within or outside Uganda.
This would mean, that if cryptocurrencies became officially recognized as legal tender in any foreign country like El Salvador in this case, it may then be classified as foreign exchange in Uganda as envisaged under the Foreign Exchange Act.
The government of Uganda has in a statement by Ministry of Finance clarified that Uganda has not licensed any organization in Uganda to sell crypto-currencies or to facilitate the trade in crypto-currencies and so these organizations are not regulated by the Government or any of its agencies.
The Government of Uganda further clarified that it does not recognize any crypto-currency as legal tender in Uganda.
Crypto-currencies qualify as digital assets designed to effect electronic payments without the participation of a central authority or intermediary such as a Central Bank or licensed financial institution. Crypto-currencies may therefore be used to effect anonymous electronic payments or bought and held for speculative purposes in the expectation that their value will rise at a future time, whereupon they could be sold for a profit.
The Central Bank and Capital Markets Authority do not regulate Cryptocurrencies though the same are not prohibited / illegal as digital assets.
Most Central Banks have adopted the “neither warm nor cold approach” towards cryptocurrencies and this leaves a big vacuum and subsequently denies key players to exploit the benefits that come along with such currencies.