Background
This article analyses the growth and development of cryptocurrency and blockchain technology in Uganda. Money developed out of various features of early societies; for instance, ceremonies and feasts, compensation for killing a man, bride price for marrying a woman, objects of gold and silver were used in religious activities. Digital currency is a form of virtual currency that is electronically created and stored in some, but not all, digital currencies, which are cryptocurrencies.
Cryptocurrency is a subset of digital currencies. However, it uses cryptography for security. There are various forms of cryptocurrencies, such as Bitcoin, which has over 81 million user wallets; Ethereum, which has about 527,158 active users; Degocoin, which has over 4 million users; and Litcoin, among others.
Conceptual Origins (1970s – 1990s): The idea of digital currency began to take shape in the 1970s, with various early attempts to create digital cash systems. Innovators like David Chaum explored cryptographic techniques for secure and private transactions, leading to concepts like “eCash” and “Digi Cash” in the 1990s.
Therefore, according to Dheeraj Sai Ram Ruju and Sneha R’s journal, on a case study on Emergence of cryptocurrency in the modern market presupposes that cryptocurrency was created and launched in 2009 by a group of programmers known as Satoshi Nakamoto though the exact details and whereabouts of the group is still unknown and this same group is having credited for creation of blockchain.
According to Ganyanna Sheba Percy in her publication on Cryptocurrency in Uganda defined Cryptocurrency as a digital currency that allows you to buy goods and services which is secured by cryptography thus making it nearly impossible to counterfeit.
However, Chris Rose from Capella University-USA in his article published in the international Business and Economics Research Journal stipulates that there is a subtle difference amongst virtual currency, digital currency and cryptocurrency in that virtual currency is type of unregulated digital money which is issued and usually controlled by its developers and accepted by members of a specific virtual community.
In Uganda, under Article 40 of the Constitution, cryptocurrency is not considered legal tender. The Financial Institute Act Cap 57, which governs and regulates financial institutions, defines cryptocurrency to mean a company licensed such as a commercial bank, merchant bank, mortgage bank, post office, among others, that is under supervision of Central Bank, which prohibits Cryptocurrency from being recognized as a financial institute in Uganda.
Justice Musa Sekana emphasized this in a locus case of Silver Kayondo Vs Bank of Uganda where the applicant filed an application of judicial review seeking for court to declare that crypto assets and currencies are legitimate digital assets tradeable in the digital economy in that can be liquidated or cashed out via mobile and other payment settlements in settlement for Uganda shillings at the free-floating exchange rates. In dismissing the application, Justice Musa ruled that cryptocurrencies under the current National Payment System Act are illegal and not acceptable as a general payment instrument.
This implies that Cryptocurrency is not controlled by government or any central agencies but rather operates on a distributed ledger known as blockchain a system of record of all transactions updated and held by currency holders, therefore units of cryptocurrency are created through a process called mining which involves use of computer power to solve mathematical problems that generate coins.
Also, users can buy currencies from brokers, individual currency owners which are then stored in digital wallets.
These digital wallets can either be hot or cold whereby the former means wallet connected to internet which makes it easier to transact but vulnerable to thefts and frauds and the later is safer but makes it harder to transact
Understanding Blockchain Technology
However, on the other hand blockchain is an append only list of transactions which are stored in blocks and secured through cryptography. This system is characterized with Distribution, Immutability, Incentivization, Automation and among others.
Whereby;
Distribution deals with blockchains designed to be physically dispersed. The entries on a blockchain do not sit on a single server, e.g. of a bank or government agency, but are at the same time distributed across many computers that form a network. This means that original copies of the same data are stored in different locations even if part of the network goes down, the ledger remains accessible to all other participants in the network.
Immutability concerns that once a transaction is confirmed by the participating parties and written into the ledger, the protocol does not allow for any changes to be made after-the-fact.
Incentivization, in order to foster the trust in the status of the ledger that blockchain is widely praised for, the technology may rely on incentivization mechanisms that encourage network participants to behave positively for example participants may be rewarded economically when positively contributing to the system.
Automation, unlike a centralized database held by a single entity, a blockchain continues to run even if individual participants or machines stop participating in the network. Just like the availability of stored data no longer depends on a single machine within the network, the processing of code does no longer run on a single computer or server.
Instead, code can run directly on a block-chain.
The Cryptocurrency Industry, like any other industry, has faced a number of challenges for instance fraud and theft, price fluctuation, limited awareness, lack of policies, among others, as explained below,
One of the biggest problems associated with crypto industry is inherent volatility. For instance, Bitcoin’s value can experience extreme fluctuations over short periods, leading to concerns about its use as a stable store of value or medium of exchange. The cryptocurrency market, including Bitcoin, is known for its susceptibility to price manipulation, market sentiment swings, and speculative trading.
This volatility can make it challenging for individuals and businesses to confidently use cryptocurrency for everyday transactions or as a reliable long-term investment. Moreover, the energy consumption and environmental impact of Bitcoin mining have also raised significant concerns. Bitcoin mining is the process by which new bitcoins are created and transactions are verified and added to the blockchain. This process requires substantial computational power and energy resources.
As a result, the carbon footprint of Bitcoin mining has come under scrutiny, with critics arguing that the energy consumption associated with the network is unsustainable and contributes to environmental degradation.
Crypto currency decentralized nature, while often touted as a benefit, can also present challenges. The lack of a central authority or governing body means that disputes, technical issues, and changes to the protocol can be more difficult to address and resolve. This has led to debates within the crypto currency community about issues such as scalability, transaction fees, and the implementation of updates, resulting in occasional “hard forks” that create new versions of the blockchain.
For instance, in Uganda case of Silver Kayondo Vs Bank of Uganda, where the applicant filed an application of judicial review seeking for court to declare that crypto assets and currencies are legitimate digital assets tradeable in the digital economy in that can be liquidated or cashed out via mobile and other payment settlements in settlement for Uganda shillings at the free-floating exchange rates. In dismissing the application, Justice Musa ruled that cryptocurrencies under the current National Payment System Act are illegal and not acceptable as a general payment instrument.
Another concern is the potential for enabling illegal activities and criminal activities due to its pseudonymous nature. While transactions on the blockchain are public, the identities of users are not always directly tied to their addresses. This has led to debates around the use of cryptocurrencies in money laundering, ransomware attacks, and other illicit transactions.
According to Dr. Lubogo, in his book, he states that the May 2018 BTC Global scam in South Africa demonstrated how companies acted fraudulently through convincing people to invest in digital tokens while promising an unachievably high interest rate and then steal the depositor’s money for example Bithumb a south Korean crypto exchange over 30million dollars of its customers were stolen where victims had given out their private keys or details of digital wallet to cybercriminal.
It is imperative to note that police get more information about crypto companies but it cannot file to prosecutors so as to place charges on crypto save for fraud a case in example is Lipisha & Bitpesa Limited Vs Safaricom Limited (2015) where petitioners unsuccessfully challenged the termination of the defendant’s license for dealing in bitcoin without a license from the Central Bank of Kenya contrary to the Money Remittances Regulations and National Payment Service Act.
Political in-fighting is the other problem facing the crypto currency community today and its potential to split the blockchain. Right now, crypto currency has many advantages in the market. Bitcoin is the most well-known cryptocurrency, the most supported fiat-to-cryptocurrency exchange method, and the largest blockchain by market cap. While Bitcoin is not innovating as quickly as other blockchains, they are making a good attempt at being the go-to cryptocurrency for investors.
So long as no one rocks the boat, they can maintain this momentum. However, if a failure happens with the Segwit transition and the chain splits, all of this momentum can be halted and the would-be underlying cause is lack of leadership.
Since the departure of many key figures in the Bitcoin community, most importantly Satoshi Nakamoto, there is a distinct lack of moral authority around the community. Instead, you’re seeing a lot of foul play and high visibility exits with no one leading the ship therefore if crypto currency is to survive unscathed, they need a strong figure to re-emerge and start directing action.
Somebody that would have the ability to get the attention of the mining community, development community and the foundation.
Additional challenge is that currency is built from trust. For millennium and still largely today, currency has been attached to hard, intrinsically valuable assets, such as gold, silver or some other universally understood and tradable commodity. Paper money, which is a relatively recent invention takes what is already a somewhat abstract concept, exchanging a gold coin for a cow for instance, and moving it to something even more symbolic.
A note that intrinsically has no value represents something collectively given value by a belief, for instance, that the US government will back up the value of the US dollar because of its large economy, military power, and sovereignty among others.
This credibility (credit) is what “backs up” the value of the dollar. There is a consensus understanding that this intrinsically worthless piece of paper is worth something and that enough people believe it to become universally valuable. Bitcoins, at this point, has very little of that. Bitcoins trade on the understanding of a few that there is a sufficiently secure method to exchange value to others who share that belief. Because that community is very small, crypto currencies’ full faith and credit extends only to those with that full faith and belief.
It may be that one day those numbers will reach a point where the universality of crypto currencies credibility will become, as it were, “common currency” among people, but until such time it will remain a niche medium exchange, and an intriguing technical and intellectual curiosity.
Source of Money Laundering, Cryptocurrency has opened further avenues of money laundering and other illicit activities. Owing to their inherently decentralized nature, authorities struggle a lot to adjudicate. Compromised personal accessories of the participants due to the penetration of malware facilitate offenders’ exploitation of the vulnerabilities of a consumer who is not so technologically savvy.
Hence, these crypto transactions can be misused by criminal organizations for their illegal purposes, harmful to any nation.The anonymity maintaining the transacting parties’ identity makes it difficult for the authorities to keep a check on the authenticity of the purposes of the transactions. Tracing the identity of the wallet involving transaction is possible but identifying the owner of the transaction based on this information is not feasible. This process of transferring valuables over the internet without the possibility of tracing the owners of the transactions become a concern for the regulating authorities hinting at money laundering.
Inadequate Literacy, according to Disha Ganguly in his report Limited awareness related to cryptocurrencies and blockchain technology play a key role imposing resignation on cryptocurrency settlement for instance in India Researchers have time and again observed that digital assets especially crypto and bitcoin are vulnerable to various exploitations. This is a major contribution towards limited success and thriving nature of start-ups and fintech organizations emerging in this domain.
This is as a result of regulatory uncertainty and lack of widespread adoption also pose challenges to crypto’s mainstream integration since different countries have taken varying approaches to regulating and accepting cryptocurrencies, which can create legal and regulatory hurdles for individuals and businesses seeking to use or invest in crypto currency.
Negligible Value, Contrary to the official fiat currency, unofficial fiat currency neither have backing by the Government nor a bullion backing.
Despite the functional benefits of the cryptocurrencies, some special functionality or tangible benefit which they claim to provide, the market potential of these functionalities depends on various correlated factors. Behavioral economics, technological advancements and the scope of financial investments are a few of them. The fluctuations and severe shocks sum up the intrinsic value of cryptocurrencies to be negligible.
It should also be noted that these private digital currencies lack the status of legal tender, and hence have no intrinsic value beyond the utility as promised by their underlying technologies. Therefore, Cryptocurrency cannot be used as a store of value or medium of exchange. Consensus based algorithms, which make cryptocurrencies trustworthy, consumes colossal amount of transaction time owing to validation procedures and network latency.
Low latency is a vital feature to be considered while designing a real-life payments system and the major challenge is the large gap in the processing speed of the transaction among the cryptocurrencies and various other digital methods which obstructs their potential as the medium of exchange. Extremely volatile prices as compared to traditional fiat currencies, refrain cryptocurrencies from being a suitable store of value and indicate that crypto markets are primarily driven by sentiments.
Notwithstanding the regulatory challenges faced in the cryptocurrencies as discussed above, blockchain was developed to mitigate some of the challenges as explained below,
Block Header, the block header contains essential metadata about the block, including its version number, timestamp (when the block was created), a unique identifier (hash) for the previous block in the chain, and a nonce (a random number used in the mining process).
The block header is crucial for maintaining the integrity and continuity of the blockchain.
List of Transactions: The bulk of the block contains a list of validated transactions. Each transaction represents a specific action or data entry that is recorded on the blockchain. For example, in the case of a cryptocurrency like Bitcoin, a transaction might involve the transfer of a certain amount of Bitcoin from one address to another.
Block Hash, the block hash is a unique cryptographic identifier for the entire block. It is generated based on the data in the block, including the block header and the list of transactions.
The block hash serves as the fingerprint of the block, ensuring its integrity and linking it securely to the previous block in the chain.
Linking Blocks: Each block in the blockchain contains the hash of the previous block in its block header. This linking mechanism creates a chain of blocks, where each block is cryptographically connected to the one before it. This is why it’s called a “blockchain.” The linkage ensures that any change to a block’s data would result in an invalid block hash, breaking the chain and exposing tampering attempts.
Mining and Adding Blocks, in public blockchains that use Proof of Work (PoW) as their consensus mechanism, miners compete to solve complex mathematical puzzles. The first miner to find a solution gets to create a new block, including a set of transactions they choose and broadcast it to the network. Other nodes in the network then validate the new block and add it to their copies of the blockchain if it is valid.
Block Size and Time, Blockchains have different block sizes and creation times. Bitcoin, for example, has a block creation time of approximately 10 minutes, and its block size is limited to 1 megabyte. Ethereum, another popular blockchain, has a shorter block time of around 15 seconds and a dynamic block size.
Block Reward: In Proof of Work-Based Blockchains like Bitcoin, the miner who successfully creates a new block is rewarded with newly minted cryptocurrency coins (the block reward) in addition to any transaction fees included in the block. This incentivizes miners to participate in securing the network and adding new blocks to the chain.
CONCLUSION;
In summary, while cryptocurrency has brought about significant technological innovations and financial opportunities, its volatility, environmental impact, regulatory challenges, and potential misuse highlight some of the prominent issues that need to be addressed for its broader acceptance and sustainable growth. Throughout this overview, we have explored the fundamental principles of blockchain technology, including consensus mechanisms, smart contracts, and the concept of decentralization. Moreover, the discussion on cryptocurrencies has shed light on the various types of digital assets, the process of mining, and the challenges posed by regulation and scalability.
Undoubtedly, the rise of cryptocurrency and blockchain technology has not been without challenges and controversies. Security, scalability, and environmental impact remain at the forefront of discussions within the industry. However, ongoing research, technological advancements, and collective efforts within the community aim to address these concerns and foster a more sustainable and inclusive future for technology.
As the landscape of cryptocurrency and blockchain technology continues to evolve, it is essential for individuals, businesses, and governments to remain informed and open-minded about the possibilities and risks associated with this disruptive innovation. Embracing the potential of blockchain technology while navigating its complexities responsibly will be critical in unlocking its true transformative power. Thus, the future of cryptocurrency and blockchain technology is one of continuous growth, adaptation, and innovation.
By staying informed, collaborating, and adopting a forward-thinking approach, we can collectively harness the potential of these technologies to create a more decentralized, transparent, and efficient global ecosystem for generations to come. It should also be noted that when you own cryptocurrency you don’t own anything tangible but you may own a key unit of measure from one person to another without a trusted third party.
About the Author; Eric Mukiibi is a third-year student at Nkumba University School of Law, Former elected MP Nkumba University School of Law in the 29th Guild Parliament, Researcher in the Nkumba University School of Law Research Club and Head of Research and Analysis department in Ethical African Organization.
Email: ericmukiibi65@gmail.com
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