The notion that innovation does not wait for regulation or more so the latter is always far behind the former is a reality. This is what has befallen the currency world today. We have seen a great rise in the virtual/ crypto currencies. With the evolution of money transaction, the idea that transactions can happen minus a third party to regulate has driven most innovators and the recent rising crypto anarchists. Crypto or virtual currencies may be defined as currencies that use a decentralised cryptography ledger that is available for any one that may wish to access it. Some of these include bitcoin, Litecoin and more. There are other definitions but what is core is that it is a cryptograph system with a decentralised ledger.
The Uganda government’s response in action and omission hitherto has but been a blunt “NO” to crypto currencies as they are considered illegal or at least not legalized therefore offering no framework or remedy for anyone that is involved or affected respectively by the transactions in the said currencies. However, one may ask whether that is the best response a state may opt for in this fast-changing technological world. The fact that cryptocurrencies do not operate within the existing financial system and the existing banking structure, the laws are unprepared to challenge cryptocurrency use. What legislative measures are available to sovereign states to maximize the effectiveness of sovereign laws while limiting undesired cryptocurrency use.
Possible responses (total ban, adoption and regulation)
There are three possible responses that a state like Uganda can opt for; a total ban, adoption and regulation. I may admit that I am pro regulation if I were the regulator and I here is why.
Total ban is the instance where stateless virtual currencies are totally considered illegal as the situation is in Uganda. Some have argued that one of the rationales is so that they pave way for a state backed cryptocurrency to be used. However, this eventually cripples innovation in itself and encourages illicit use of the cryptocurrencies as they have been widely accepted and popular. Anyone that can access the internet with a phone or any gadget can access these currencies and as such for a total ban to be effective, an internet shut down may be needed. I don’t think this would be good for a state like Uganda as it affects various civil rights and freedoms.
Adoption on the other hand is where a state approves and adopts the use of cryptocurrencies either stateless or state backed crypto /virtual currencies. Some have argued that some of the rationales for adoption are to incorporate the unbanked and the auditability of these currencies. Theoretically, less developed countries like Uganda may opt for cryptocurrencies to incorporate the unbanked.
With a state backed cryptocurrency by the central bank then the said cryptocurrency will cover this unbanked part of the population hence allowing them access to the state financial structure.This goes as far as theoretical; no country has tried it out so far. Meanwhile, the auditability of cryptocurrencies is both ideally and practically attractive especially for a country that is faced with a scourge of embezzlement and corruption since there is evidence of every transaction. With adoption of a state backed crypto or virtual currencies, users would easily be incentivised to register and transact peer to peer basis than other electronic methods of transaction and in any case a licit user of the currency would have no trouble with registration.
With adoption of cryptocurrencies however, there is an assumption that every citizen has access to the internet in a working economy. This poses a great challenge to the adoption strategy. Internet coverage for instance in Uganda is about 40%.
Regulation remains the most appropriate pathway. It is note worthy that there is no country that has issued out regulations for cryptocurrencies on a supranational level as most are still afraid to lose trust in fiat currency. It is difficult to find a regulation that may not necessarily affect the rights of the citizens to own and transact in cryptocurrencies and at the same time keep the state’s needs. Cryptocurrencies are also hard to define thereby hard to regulate. The rationale behind regulation is consumer- investor protection and protection of the monetary policy.
The digital nature of cryptocurrencies makes them accessible to the general public provided that public is digitally aware. Broad access is obviously desirable but exposes vulnerable groups. In a regular financial world such investments like Initial Coin Offerings should be done by venture capitalists who understand the risks. There have been possibilities of fraud in situations where the system has been beaten. For example, a group of hackers known as the “51 crew” took control of more than 51% of two blockchain clones shift and krypton thereby defrauding close to $65 million in bitcoin through taking over the verification process. Such cases of fraud and uncertainty in the cryptocurrency world therefore calls for policy framework on this fast-changing technology. For the survival of any economy, the protection of consumers, investors and the monetary policy is critical.
With the wide acceptance and use of a stateless cryptocurrency in a sovereign state, the citizens will eventually by pass the state and the central bank completely if there is no regulation. We cannot pretend and shy away from the fact that cryptocurrencies may take a high rise in Uganda in the next decade or so. That reinforces the argument for regulation to protect the monetary policy, consumers and investors is needed to avoid the significant drawbacks once ignored.
The central bank has put in place a task force to study the dynamic nature of cryptocurrency so as to understand when and how to respond to the fast-changing technology, I hope they read this.
The writer is a law scholar and a cryptocurrency enthusiast.