In the early 19th century, because of the profound distrust by the Americans of the general concentration of financial power, and central banks; the USA was faced with a conundrum of two central banks whose charters weren’t renewed.
This led to an 80-year period of financial instability: banking panics, the inefficiency of the payments system, and the frequent failure of banks. Today, this mistrust in central banks has spilled over to citizens globally because the institutions are nationalized and not independent from political influence; [and] considering that they are struggling to keep up with financial innovations that have been disruptive — cryptocurrency.
This laggardness by some central banks, like Bank of Uganda [BoU], that has chosen to deploy a ‘stuck in the mud’ mindset of smothering that they detest [cryptocurrency], in favour of hosting spayed seminars, and issuing banal press statements, is counterproductive.
It has effectuated the sidestepping of prevailing economic realities that they should be addressing; since they are the custodians of monetary policy in the country. On April 29, 2022, Bank of Uganda [BoU] released a written paper about an earlier dossier published by the Government of Uganda, through the ministry of Finance, Planning and Economic Development, warning institutions to discontinue facilitating crypto transactions. An action that reaffirmed their unaltered stand on the virtual digital currency.
In part, the letter read: “[…] Bank of Uganda has not licensed any institution to sell crypto-currencies or to facilitate the trade in crypto-currencies.
“[…] This is to warn all licensed entities… to desist from facilitating cryptocurrency transactions”. The letter continues to outline the risks of crypto and concludes by advising the public to stay clear of the virtual digital token.
This stymie on crypto isn’t surprising [surveys have shown that only one in ten people know how cryptocurrencies work]; and has triggered the cancellation of deposit/withdrawal services from Uganda by crypto platforms like Binance, until further notice.
In emails sent to their subscribers on May 24, 2022, they wrote, ‘…our UGX payment partners are suspending withdrawal and deposit services until further notice. Binance will temporarily suspend UGX withdrawals and deposits….” This development is going to hurt the licensed intermediaries — banks and entities that facilitated crypto trading as they have been put out of business.
Crypto holders are going to resort to peer-to-peer transactions [that are more relaxed in their trading requirements] to bypass this bottleneck. And, the government is going to miss out on taxed revenue from these crypto transactions and intermediaries.
To realise the impact crypto has had in its short existence, one has to understand what exactly it is, and if it emerged without advance notice. Cryptocurrency is a virtual currency and form of digital asset that can be traded or used to buy goods/services. It’s enabled by a technology commonly known as blockchain.
Its arrival was presaged as early as 1921 by Henry Ford [founder of Ford motor company], who envisioned ‘money being based on units of electricity’ that would be used to price commodities, and pay wages.
Likewise, Milton Friedman, Nobel laureate in Economics in 1999, spoke of a reliable e-cash on the Internet where funds would be traded from person to person in obscurity.
Identically, inventor of PayPal [with Elon Musk], and angel investor Peter Thiel, foresaw a move from physical to electronic dollars being enabled by technology taking place on the Internet as far back as 1998.
With this anticipated background, it is expected of BoU [that has continually been tended by an elitist administration], to create room for disruptive innovations, and give crypto the benefit of litigation. Because it [crypto], exposes the financial system to risks that impact the monetary, fiscal, and welfare of Uganda and its natives.
It’s for this reason that I strongly suggest that BoU as a financial advisor to the government, cautions it to regulate cryptocurrencies rather than banish them. Following in the footsteps of Nigeria, South Africa, Portugal, South Korea, Brazil, United Kingdom, California and many others, Uganda should regulate cryptocurrencies for the following reasons:
Overall, crypto is here to stay and the countries that ignore it, do so at their peril.
There has been a notable surge in crypto transactions in the countries that continue to ban it —China, for example, earned over $5.06 billion [5th highest earner] last year despite rendering it illegal. Meaning, that ignoring the digital token is inept and exposes financial systems to more unhedged risk.
Secondly, the government should step in to protect investors: individuals, and entities active in the crypto-market, by licensing virtual service providers of the virtual coin. This way, they will control which coins will be transacted while curbing fraud, and any other illegal activities on the exchanges.
This, the UK government has done by identifying coherent fiat/currency-backed cryptocurrencies known as stable coins, to be accepted as a means of payment. By so doing, the government controls which cryptocurrency will be favourably circulated, and which won’t; narrowing the pool from over 13,424 digital coins, to a handful of stable coins.
Cryptocurrencies if taxed, can be a major source of revenue for the government. Fast-moving governments are proposing capital gains taxes on the sale of crypto assets. In their format, cryptocurrencies realise high gains.
For example, in 2021, total crypto gains across all cryptocurrencies was $167.7 billion— The Times Of India. Some coins realised gains of 3,413,999,900% [Shiba Inu], with the lowest gains being 15% [EOS].
If the government started to look at crypto through different lens — not as a currency alone, but an asset too; it [government] would increase its tax base by taxing not only the crypto transactions but the businesses that are licensed to offer the service.
Again, cryptocurrencies are energy-intensive, which makes them a perfect match for Uganda seeing as we are a high power-generating country with potential that goes to waste [consumption of electricity in Uganda is among the lowest in the world].
The government could look into becoming a safe haven in the region for crypto mining to put to use the 1,270MW generated, according to UEGCL [Uganda Electricity Generation Company Limited]. This capacity is going to be ramped up to 3,500MW by 2025.
What’s more, digital tokens are very deeply ingrained in people’s lives and have influenced the migration of people to places deemed favorable to crypto; like many have migrated to Portugal because it is a tax haven for cryptocurrencies. Recent proposals to tax crypto in Portugal have been rejected.
It goes without saying that regulating cryptocurrencies would improve awareness among investors and broaden the understanding of the virtual coins among the public and legislators who don’t look beyond money laundering as the major downside of the digital currency.
Aggravatingly, it’s fishy that BoU doesn’t mention in the slightest that they sent a contingent to El Salvador to be hosted by President Nayib Bukele to learn about the rollout of Bitcoin between May 17 and 20, 2022.
On President Nayib Bukele’s official Twitter handle on May 16,2022, he wrote: “Tomorrow 32 central banks and 12 financial authorities (44 countries) will meet in El Salvador to discuss financial inclusion, digital economy, banking the unbanked, the Bitcoin rollout and its benefits in our country”. He continued to list Bank of Uganda as one of the central banks represented at this cryptocurrency summit.
The two-facedness the government is giving off by publicly acting indifferent to cryptocurrencies, and secretly attending meetings to try and understand it, is hypocritical.
Instead, the government should own up and issue a statement in regards to studying the digital phenomenon for proper consideration and regulation.
Twitter: m_kidamba
Mark Kidamba is an independent financial/investment analyst.
