The news that the Bank of Tanzania has banned the use of cryptocurrencies has raised eyebrows and fuelled concerns that this could hamper the country's economic progress in an increasingly digital world. The central bank's announcement was made in a public notice on 12 November 2019, causing a stir among consumers and traders alike.
What is cryptocurrency?
Cryptocurrency has been described as 'a digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank'.
Cryptocurrency rose to prominence in 2009 when Bitcoin, the first globally famous decentralised cryptocurrency, was created. Cryptocurrency has over the years gained traction in Tanzania, with reports ranking its cryptocurrency-mining sector 120th out of 219 countries that are actively involved in Bitcoin mining. According to Baker McKenzie's 2018 report on Block chain and cryptocurrency in Africa, Tanzania's electricity consumption in cryptocurrency mining is predicted to amount to exceed that of the entire country's annual non-cryptocurrency consumption.
Prominent economists such as Milton Friedman have openly endorsed the use of cryptocurrencies, stating that the internet would be one of the major forces for the reduction of third parties ( the government ) in transactions government's All that would be missing (but is soon to be developed) is a reliable form of e-cash.
Reasons for the popularity of cryptocurrency
Cryptocurrency has significant advantages over traditional investments in many ways, financially and economically, explaining its popularity both within and outside Tanzania:
Liquidity is one such advantage. Bitcoin is regarded as one of the most liquid assets in the financial market, easily tradeable for cash or other assets such as gold. This, coupled with transaction low fees, creates a viable ecosystem for investors to trade in, especially those looking for short-term profit. Unlike company shares or publicly traded funds, no intermediary is needed to process and settle orders.
Other advantages are high market demand for cryptocurrency and the fact that it is a deflationary currency, meaning its value will continue to rise until its available supply maximises, making it an attractive long-term investment.
Finally, Cryptocurrency trading is subject to minimal regulation, with no requirement for investors and traders to hold a licence or certificate proving their identities and trading history.
Purported reasons for the ban in Tanzania
Although the BoT has not expressly stated its reasons for banning the use of cryptocurrency, the most common reasons advanced for banning cryptocurrencies in other jurisdictions are as follows:
- Virtual currencies are traded on unregulated exchanges, and customers who lose money on such exchanges have no legal redress.
- Cryptocurrencies have no underlying assets and their value is speculative in nature. This may result in high volatility, exposing users to potential losses.
- Cryptocurrency transactions and accounts are not connected to real-world identities, a phenomenon known as 'pseudonymity'. Experts argue that this could promote money laundering and fraudulent activities.
The Bank of Tanzania is not the only Central Bank discouraging dealing in cryptocurrencies. In December 2015, the Central Bank of Kenya (CBK) issued a public notice titled 'Caution to the Public on Virtual Currencies such as bitcoin', in which it highlighted the risks of dealing in virtual currencies. The notice stated that these currencies are not legal tender and remain unregulated in Kenya, meaning no protection exists in the event that the trading exchanges fail or go out of business.
Similarly, in 2017 the Bank of Uganda (BoU), which has said cryptocurrencies are not under its regulatory purview, issued a warning against the use of cryptocurrencies, citing the lack of protection available to investors. BoU specifically discouraged the services of an entity called One Coin Digital Money.
Analysis of the ban
Some observers have argued that the cryptocurrency ban in Tanzania is heavy-handed. They point out that neither the BoT nor the Foreign Exchange Act cited in BoT's public notice define what legal tender is. The circular states, among other things, that 'The only acceptable and used legal tender in the country is the Tanzanian Shilling'.
Since other foreign currencies are traded by licensed institutions in Tanzania, in line with the applicable foreign exchange regulations, those opposed to the cryptocurrency ban argue that BoT should take a progressive approach -looking approach and recognise cryptocurrency as a means of exchange or as legal tender. Ugandan President Yoweri Museveni has publicly said that cryptocurrency should be recognised as a new means of exchange. In his speech during the Africa Blockchain Conference in Kampala on 2017, H.E. Museveni criticised the BoU Governors for their 'dogmatic' approach to cryptocurrency, and called on the BoU to embrace technological advancements such as cryptocurrency which could spur quicker service delivery.
However, even if cryptocurrency were to be recognised as legal tender, its decentralised nature would remain a challenge from a legal perspective. As BoT stated in its public notice, sections 26 and 27 of the Bank of Tanzania Act No. 4 of 2006 (the BoT Act) make BoT the sole institution mandated to issue banknotes and coins.
Cryptocurrency and the National Payments System Act
Another argument raised by proponents of cryptocurrency is that, as a privately created unit of exchange that can be bought, sold, traded or transferred, it is property rather than a proxy for legal tender. Like other private units of exchange (i.e. bonus points from commercial purchases), cryptocurrency would not pose any risks to the monetary system. Going further, cryptocurrency advocates argue that a cryptocurrency transaction is essentially an electronically facilitated exchange of property for property – a form of barter, in other words.
However, Tanzania's National Payments System Act No. 4 of 2015 (the NPS) clearly prohibits payments of this kind. Section 15 of the NPS provides that a person shall not issue an electronic payment system without a licence or approval from BoT. While there is no notable case law to report from in Tanzania, neighbouring Kenya has dealt with such a matter. In the matter of Lipisha Consortium Kenya Ltd and Bitpesa Ltd V Safaricom, the Central Bank of Kenya ruled that Safaricom was vindicated in suspending the services of Lipisha Consortium Kenya Ltd and Bitpesa Ltd on the grounds that they had not received prior approval from CBK before dealing with money remittance services using Bitcoin. It is likely that Tanzanian courts would take a similar approach.
Lastly it is important to note that as per section 70(3) of the BoT Act, the Board of Directors of the Bank may make by-laws and rules and issue directives, orders and circulars regulating activities carried out under the Act. Thus, it is not a valid argument to suggest that, in order to give effect to the cryptocurrency ban, BoT's public notice should have been gazetted, as pursuant to section 70(4) of the Act the by-laws and rules and directives, orders and circulars are not required to be gazetted.
Looking to the future
There are some suggestions that regulations should be enacted to regulate cryptocurrency, along the lines of Japan's approach. This would entail introducing a registration system for those engaged in cryptocurrency exchange, while subjecting cryptocurrency transactions to stringent money laundering regulations, thus protecting cryptocurrency users and addressing the concerns raised by BoT in its public notice.
Practical effect could be given to this by requiring cryptocurrency business operators to register with a competent authority, as well as requiring business operators or their representatives to be resident in Tanzania or have an office in Tanzania. Minimal capital requirement could also be imposed.
As regards money laundering, stringent Know Your Customer (KYC) regulations could be introduced, requiring business operators to store their transaction records for later scrutiny and impose a duty upon them to report suspicious transactions. This would not be failsafe, but it must be said that that even financial institutions such as banks are exposed to money-laundering risks, as evidenced by the money-laundering fines of USD 425 million and USD 70 million imposed on Deutsche Bank and Citibank.
With respect to the tax treatment of cryptocurrencies, profits from sales could be treated as miscellaneous income or cryptocurrency sales could be subjected to capital gain tax, as is the case in other jurisdictions such as South Africa.
In the final analysis, it would be beneficial for Tanzania's position on cryptocurrency to be firmly stated in the law. Cryptocurrency is a recent phenomenon – unlike the two main pieces of legislation used to deal with it: the Foreign Exchange Act is 27 years old and the BoT Act 13 years old.
While many of the fears and concerns around cryptocurrencies may be legitimate, an outright ban on these currencies may be heavy-handed. Given the rapid technological advancements taking place across the world, it may be more beneficial to the Tanzanian economy to allow regulated use of cryptocurrency, thus addressing the concerns while also enabling the country to derive the economic benefits associated with cryptocurrencies.
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