About Bitcoin and regulation by Bank of Uganda

OPINION

In 2017, Bank of Uganda issued a press release that was circulated in the media, warning the General public about "One-coin Digital Money' operations in Uganda. 

The statement by the Central Bank Governor, warned that one coin's dealings in crypto-currency like Bitcoin, falls outside the regulatory purview of the Central Bank.

In my view, this was an oversight from Bank of Uganda as some forms of currency like Bitcoin, fall under the mandate of Bank of Uganda. 

Bitcoin is a form of electronic currency that allows transactions to be performed without banks or any other middlemen. Despite some risks, Bitcoin is a very interesting and dynamic technology that can change how eCommerce will be conducted in the future. 

When it comes to eCommerce, Bitcoins are a secure payment mode. They can be used to securely purchase items or transfer money across borders quicker and more efficiently. 

Online Stores like Expedia, Microsoft & Virgin Galactic have embraced Bitcoin as a form of digital currency.

Recently, Bitpesa in Kenya, announced a B2B service that allows business owners in Tanzania, Kenya, Uganda & Nigeria to send and receive payments within and outside Africa. Bitpesa has since had a falling out with Safaricom, that has declined to host the Bitpesa, Bitcoin service on their platform. 

But, although Bitcoin may be an asset to eCommerce, it can also be (and has been) seen as a liability.

Because Bitcoin does not reside in any given regulation, people can operate the network anonymously. This provides opportunities for criminal activities, including tax-evasion, terrorist financing and money-laundering. 

Bitcoin exchanges/websites are also susceptible to hacking as was seen in February 2014, when Mt. Gox (Japan), which was once the world's largest exchange for Bitcoin, filed for bankruptcy protection after reporting that 850,000 bitcoins, worth $450 million at the time, had disappeared or been stolen by hackers. 

Although it's used allover the world, Bitcoin lacks a specifically recognized legal and regulatory framework.  In countries like China, Thailand & Bolivia, Bitcoin has been banned.

In China specifically, The Central Bank of China, in December 2013, banned financial institutions and payment services from Bitcoin-related business. This was done in order to avoid harm to the public and to the legal monetary status of their currency; that might occur as a result of "excessive speculation" in Bitcoin and other virtual goods.

Third party service providers were also told to stop offering clearing services to Bitcoin exchanges.

In Australia & Argentina, Bitcoin is not legal tender but is also not illegal. In December 2013, the German Finance Department recognized bitcoins as a financial instrument similar to an international currency, which can be used to carry out private transactions or exchanged for other currencies, without being legal tender. in Japan, Bitcoin is recognized as a virtual currency that is a store of value but not expressly recognized legal tender. 

Although Uganda does not officially recognize Bitcoin as a form of currency, Section 3 of the Foreign Exchange act 2004 (the Act), defines "foreign currency" to mean a currency other than the legal tender of Uganda.

It further defines "foreign exchange" to include 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. 

This would mean, that if Bitcoin became officially recognized as legal tender in Japan, it may then be classified as foreign exchange in Uganda as envisaged under the Act. 

There is still debate in Japan as to whether the Japan Payment Services Act, that was amended in 2016 to include virtual currencies, actually gives cryptocurrencies the status of a currency. 

Section 3 further defines a "foreign exchange bureau" to mean a person holding a license issued by the Bank of Uganda to engage foreign exchange business. "Foreign exchange business" is defined by the same Act to mean the business of buying, selling, borrowing or lending of foreign currency. 

Consequently, any business that intends to buy, sell, borrow or lend Bitcoin, must do so under license from Bank of Uganda. 

I was surprised to see the Central Bank distancing itself from Crypto-currency, especially after Uganda after the UNAFRI (United Nations African Institute for the Prevention of Crime and Treatment of Offenders) July 2016 roundtable conference that focused on virtual currency in Uganda. 

As long as eCommerce continues to prosper, it may be wise for the Central Bank to offer some form of regulatory framework for Crypto-currency. 

Although Bitcoin may be seen as risky, registering and issuing licenses to Bitcoin dealers, may be a prudent way for regulators to keep an eye on sellers, not only for ensuring compliance with the law but also for consumer protection.

This will ensure compliance with tax laws and also give recourse to bitcoin users in cases like the Mt. Gox one above. 

Bank of Uganda, may also decide to include them under agency banking since Bitcoin may be lent or exchanged with local currency.

This has been done in Germany, when in July 2013, when Bitcoin Deutschland GmbH, the company that manages the exchange platform Bitcoin.de, entered into a partnership with Fidor, a bank, in order to provide banking services to Bit- coin.de clients. 

This author also takes cognizance of the National Payments Bill, 2018 that is meant to regulate payment systems in Uganda.

The bill defines electronic money under section 2, to mean monetary value which is stored electronically, including magnetically and which is issued on receipt of funds for the purpose of making payment transactions.

It is unclear at the moment, whether cryptocurrency will be recognized as electronic money under that section; with the manner of the wording, it wouldn't be fanciful speculation to interpret it as such. 

Bank of Uganda may also take up the option of going the JP Morgan way by creating its own blockchain and virtual currency.

In early 2019, it was reported that US investment bank JP Morgan had created a crypto-currency (JPM Coin) to help settle payments between clients in its wholesale payments business.

The crypto-currency, which runs on blockchain technology, has been used successfully to move money between the bank and a client account.

Surprisingly JP Morgan's CEO Jamie Dimon had in the months preceding the launch, publicly criticized Bitcoin but in the same breath smartly disclaiming that he has always "believed in the potential of blockchain technology".

We have of course listened to the same narrative from Uganda's Central Bank Governor so perhaps it is only a matter of time before our Bank of Uganda wakes up and smells the coffee. 

Unequivocally, for Bitcoin to have a future and relevance to eCommerce, clear rules are required, along with some kind of governmental acceptance. This might be formal acceptance of Bitcoin as a form of legal tender or as a formally recognized form of currency that can be used in trading. 

The writer is Partner- Technology, Media, Telecommunications, Intellectual Property with KTA Advocates 

www.ktaadvocates.com