Is Uganda prepared for the cryptocurrency revolution?

Tuesday February 23 2021
pros5pic

Some analysts believe that it is better for Uganda to adopt this new finance innovation of cryptocurrencies at an early stage to offset any emerging risks. PHOTO/courtesy

By Paul Murungi
By Rachel Nabisubi

The recent purchase of $1.5 billion (Shs5 trillion) worth of Bitcoin by US billionaire Elon Musk set a precedent by skyrocketing Bitcoin value on the US stock market currently valued at $50,000 (Shs180m), a figure expected to drop or rise soon.

 Musk, owner of Tesla, an electric car company later announced on Twitter that Tesla was moving to accept Bitcoin as a form of exchange for purchase of his cars.

Bitcoin is the oldest form and commonest cryptocurrency. However, there are more cryptocurrencies on the market which we shall discuss later in detail.

Cryptocurrency trading, also known as mining, is a growing global wave which is increasingly tilting the traditional global financial system. For Uganda, the recent financial scams associated with the trade has kept many away.

 Uganda is not in isolation. Other countries such as Nigeria - the biggest Bitcoin market in Africa - continue to associate cryptocurrency with money laundering, fraudulent transactions, Pyramid schemes and currency black markets.  

In fact, last week, the Central Bank of Nigeria banned trading in crypto currency in a raft of measures that seek to maintain balance of the monetary system.

Advertisement

From a historical perspective, cryptocurrency has been equated to the Internet bubble of the 1990’s, when the Internet was new. The Investopedia website shows that this bubble was largely attributed to a new, poorly understood commercial opportunity presented by the popularisation of the World Wide Web.

Many investors, including institutional investors were uncertain on how to value new companies with business models built on online activities.

Many thought the Internet based companies would crash leading to massive losses of money. However, 90 per cent of global value currently moves over the Internet today debunking the Internet myth. 

The Ministry of Finance maintains a statement on its website warning the public against cryptocurrencies.  

 “The government of Uganda does not recognise any crypto-currency as legal tender in Uganda. The general public is further advised of the following risks associated with crypto-currencies.” the statement reads.

“Most crypto-currencies such as Bitcoin and Ethereum are not backed by assets or government guarantees. Therefore holders of these cryptocurrencies are fully exposed to the risk of loss or diminishing value as the issuers are not obliged to exchange them for legal currency or other value.”

  A similar view is echoed in the corridors of Bank of Uganda which maintains on its website that   investing in a digital Currency is taking a risk in the financial space where there is neither investor protection nor regulatory purview.

 But for how long are we going to bury our heads in the sand to avoid the cryptocurrency storm?

Some analysts hold the view that its better for Uganda to adopt this new finance innovation at an early stage to offset any emerging risks.

 Tech savvy and cryptocurrency enthusiasts in Uganda want the country to have an equal footing with the rest of the world, which in many ways has remained a distant dream with financial regulators warning of dire consequences. 

Understanding crypto currency

Cryptocurrency, according a white paper; ‘Bitcoin: A Peer-to-Peer Electronic Cash System by Satoshi Nakamoto, its founder, writes that its purely peer-to-peer version of electronic cash or virtual assets secured by cryptography, which is a method of encrypting and hiding codes which allow store of value and online payments to be sent directly from one party to another without going through a financial institution.  

Trading

Mr Augustine Muhindo, a Cryptotrader in Uganda, says crypto currencies are traded locally on decentralised markets online also known as exchanges such as Binance, Kucoin, Coinbase , Bitpesa among others.

Noah Baalessanvu, another crypto trader at Crypto Savannah in Uganda says Uganda’s crypto exchange markets are growing and require a minimum of Shs50,000 and a maximum of Shs20 million to start trading.  

Such crypto traders are partly regulated as Virtual Assets Service Providers under the Financial Intelligence Authority’s Anti- Money Laundering Act.

Mr Baalessanvi says since price is the purchasing power of the market, crypto currency price movements are largely determined by the forces of demand and supply on the market because it is an open market.

This means there’s a significant number of people who are willing to buy, and here it is not just demand but effective demand where people have the ability to purchase Bit coin at such a price.

In basic economics, when demand exceeds supply, prices rise. However, when

 Baalessanvu says some crypto currencies have significant volatility and variability in their prices especially those that are speculative in nature.

“The crypto business is as fragile as any other business. If you enter the markets blindly, you are going to lose money,” he says. 

Rules

Supply and demand

 The rules that govern Crypto show that it was designed with only 21 million coins in circulation which is determined by algorithms for trading implying it has a fixed supply on the market.

Just like land, Baalessanvu explains that anything with fixed supply will always have a high demand.


Advertisement