Uganda has shown her interest in the blockchain technology, and the propensity towards it was displayed during the recent blockchain conference, where both the President and ICT Minister endorsed the idea of working out means to exploit the technology.
Amidst efforts by government to take on blockchain and increased public interest, lawyers Silver Kayondo and Daniel Bill Opio from Ortus LLP sat down and analysed the existing laws that could be relied on while rolling out blockchain in Uganda.
In their document titled ‘legal and regulatory aspects of blockchain and smart contracts in Uganda’, they also recommend other regulations that need to be incorporated in the existing legal regime.
Below SautiTech’s editor Nicholas Asingwire summarizes their work. Their document also covers smart contracts.
The duo used Michael Crosby and colleague’s definition of blockchain, which calls the technology a distributed database of records or public ledger of all transactions or digital events that have been executed and shared among participating parties. Each transaction in this public ledger is verified by consensus of a majority of the participants in the system.
Blockchain and cryptocurrencies are often intermixed, but blockchain has received more support compared to cryptocurrencies (because of multiple controversies that surround them), and it is being successfully applied to both financial and non-financial world applications.
The United Nations pilot program for instance has reportedly has sent vouchers to Syrian refugees using the Ethereum blockchain.
The blockchain is designed in such a way that it lacks a centralized point of vulnerability (the weak link) for hackers to manipulate and attack the system since each block includes the previous block’s ‘hash’. Therefore, any attempts to alter any transaction with the blockchain raise red-flags and are easily detectable. Regulation 5 of the Electronic Transactions Regulations of 2013 recognizes hash marks as a unique identifier attached to a data message.
Application in Uganda
Use cases for blockchain in Uganda are on the rise; for instance, at the Africa Blockchain conference, there were demonstrations of blockchain being deployed in fighting counterfeit drugs and medicines. A team from BitLand also discussed with the ongoing commission of inquiry into land matters to showcase how blockchain technology can be used to complement the existing Torrens land registry system in the country.
Domestic challenges like weak public institutional capability, poor data and records management systems, poor infrastructure, tax collection challenges, need for more financial inclusion, emerging digital economy trends, etc make blockchain a potential leapfrog technology that is not only relevant but also easily adaptable to Uganda’s trial/piloting and actual use cases.
The technology can be applied in various sectors including among others banking and finance, transport and logistics, military and defence, education and research, records management, healthcare, pharmaceuticals and life sciences, professional services (legal, auditing, accounting, etc), tax and revenue services and voting and political management.
Legal and regulatory issues of blockchain in the Ugandan context
Section 43 of the Electronic Signatures Act of 2011 (ESA) enjoins certification service providers and subscribers to only use trustworthy systems in their operations. Since blockchain is automation of trust, the requirements under the ESA are applicable. Furthermore, cryptosystems such as asymmetric cryptos are recognized under the ESA as algorithms or series of algorithms which provide secure key pairs.
Therefore, to successfully implement a blockchain technology project in Uganda, there is need to have regard to the following legal and regulatory paradigms.
Service Level Agreements (SLAs)
These are governed by the Contracts Act of 2010 and the Sale of Goods and Supply of Services Act of 2017. Clear scoping, representations, warranties, consideration/payment, performance models, and risk-allocation clauses must be agreed and executed by the parties to constitute legally binding SLAs.
Computer software is recognized as goods under the Sale of Goods and Supply of Services Act. Therefore, all rights and remedies relating to sale and performance of goods and supply of services are enforceable. SLAs need to be specific as to whether they relate to sale/vending of software or provision of services or both. Note should be made of the limitation of liability provisions under Part V of the Electronic Transactions Act of 2011 (ETA).
Regulatory compliance
The regulators are actively studying the technology, but targeted regulatory frameworks for Distribution Ledgers (DL) are yet to emerge. Introduction of blockchain systems may require seeking a “no objection” from the relevant regulatory entity.
Ownership and Control
Uganda has established a robust Intellectual Property legal regime. Patents and Utility models; Trademarks; Copyright; and Trade secrets are enforceable. IP transactions such as licensing, sub-licensing, assignments, sub-assignments, and transfers are also recognized. There is also strong justification for deployment of blockchain in IP assets management and registration protocols.
– The ESA provides for both public key infrastructure (PKI) and private keys. However, it is not specific on distributed ledger systems. The proposed amendment would explore specific provisions for “permissionless” (open and public) and “permissioned” (private) blockchain networks.
– There is also need for specific statutory clauses on Decentralized Autonomous Organizations (DAOs). These are unregulated digital entities that execute online instructions and transactions through pre-coded systems. They are mainly used in smart contracts. Since these entities rely on automatic coded systems, the Ugandan regulatory regime will have to deal with the aspect of where and to whom to affix liability in the event of legal and regulatory disputes.
Consumer protection
Another area to address pertains to consumer protection within the blockchain
ecosystem. For instance, consumers have no control over the functioning and control of permissionless/public blockchain systems. In cases such as inaccurate/defective account settlements, erroneous money transfers, wrongful counter-party deductions, etc, the consumers will remain exposed to losses.
The Ugandan digital framework must have inbuilt risk allocation strategies that not only safeguard Ugandan consumers and businesses, but also the integrity of the system as a whole. Section 26 of the ETA generally invalidates provisions excluding consumer rights.
– Lastly, competition/anti-trust issues arising from blockchain must be addressed. In regulated sectors such as telecommunications, petroleum, banking and finance, etc is is imperative to assess whether competition enforcers such as the Uganda Communications Commission (UCC), the Petroleum Authority of Uganda (PAU), Bank of Uganda (BoU), etc should be given permission and the regulatory tools to access blockchains to enable them to monitor and investigate trading prices in real-time and spot suspicious trends in market conduct.
Whether it be in cases of investigations of mergers, abusive conduct or markets more generally, full access to a blockchain could provide the authorities immediate access to the necessary data required to enforce competitive market conduct.
– Jurisdictional issues and dispute resolution Blockchain has the capability to be subject to multi-jurisdictional challenges because the distributed ledgers, nodes and servers can be located anywhere in the world.
In this decentralized form, it may be difficult to ascertain the jurisdictional rules applicable to certain transactions in the event of legal disputes. At a practical level, exclusive governing law and jurisdiction clauses must be embedded in the various agreements pertaining to blockchain. Dispute resolution mechanisms such as arbitration clauses must also be clear and specific on the rules applicable, forum and language.
Tax implications
At present, there is lack of regulatory and tax clarity on taxation of blockchain because it is a technology the Uganda Revenue Authority (URA) is still studying keenly. However, under the Value Added Tax (VAT) regime, tax is payable on every taxable supply in Uganda made by a taxable person; every import of goods other than an exempt import; and the supply of any imported services by any person. With exception to exemptions under the VAT Act, the tax payable in the case of a taxable supply, is to be paid by the taxable person making the supply.
In the case of an import of goods, is to be paid by the importer; and in the case of an import of services, the tax is to be paid by the recipient of the imported services. Presently, VAT is 18%. Therefore, parties seeking to engage in blockchain transactions must consult their tax advisors on other tax implications such as corporate tax and capital gains tax that may be applicable to a specific transaction.
Regulations governing smart contracts will be looked at in the next article…
