Many Ugandans have lost their hard-earned money by investing and trading in cryptocurrencies. Cryptocurrencies, according to Bank of Uganda (BoU), are an Internet-based disruptive payment technology that is stored in a database called Blockchain.
Cryptocurrencies, which are among the biggest disruptors in the financial sector, currently have no regulatory oversight because government does not recognise any cryptocurrency as legal tender. So in case of losses, investors would have no recourse. This technically means that if you use digital currencies to settle your transactions, you do it at your own risk.
State minister for Planning David Bahati has asked Ugandans to desist from the temptation of using cryptocurrencies to trade. His warning comes against the backdrop of several warnings last year, urging Ugandans to avoid investing in this medium. BoU oversees commercial banks, credit institutions and micro-deposit taking institutions, foreign exchange bureaus and money remittance services.
It is worth noting that the value of these virtual currencies is free from monetary policy and economic performance measurements that apply to traditional currency because they are not issued by central banks.
So, what do the values of cryptocurrencies rely on? Their value depend on their own supply and demand for them and other competing cryptocurrencies. Mr Stephen Kaboyo, the managing director at Alpha Capital Partners Uganda, says their value comes from computers that perform several complicated calculations to create new coins.
The impact? The fact that they are hard to predict creates high-level speculation around these currencies, resulting in high levels of volatility.
But there are risks of a highly volatile currency in a market like Uganda. A highly volatile currency is dangerous for business. It creates adverse spikes in commodity prices, unpredictability in cost of capital due to spinning interest rates and many more undesirables.
Last year, Finance minister Matia Kasaija said digital currencies tend to change value rapidly over time. So while holders of crypto-currencies may make profits when their value rise, they will suffer losses when the value fall.
Virtual currencies are also attractive for use in criminal transactions such as money laundering, sale of prohibited goods and services as well as fraudulent ventures such as Ponzi and pyramid schemes. Pyramid schemes do not sell products or make real investments; they rely on money from new investors which is channelled to those at the top of the pyramid.
Therefore, Ugandans should stay away from trading in cryptocurrencies given that they are associated with many risks.