What Next After Gov’t Declines to Approve Proposal to Regulate Cryptocurrency

Nathan Igeme Nabeta, the Jinja East Municipality Member of Parliament has asked the Speaker of Parliament to apply the rules of the House allowing debate of the Capital Markets Authority Amendment Bill without a certificate of financial implications.

The government, through the Ministry of Finance, Planning and Economic Development has declined to issue a Certificate of Financial Implications for the Capital Markets Authority (Amendment) Bill 2022. The Bill, among others, seeks to create a licensing and regulatory function of virtual assets, including cryptocurrency, in the powers of the CMA.

In November last year, Parliament granted Nabeta leave to introduce a Private Member’s Bill on securities and markets, with the aim of strengthening the operations of stock markets. The Jinja South Division East MP said that the law would clearly provide for the functions of the Capital Markets Authority (CMA) and regulate the conduct of approved persons, as opposed to regulating products and activities as the case is currently.

“The CMA Act creates confusion in the mandate of the Authority by granting the power to make regulations, providing for fees to be charged for regulated activities in capital markets, yet the Act does not make provision for regulated activities but provides for approved and regulated persons,” Igeme said. He added that the new law would incorporate into the CMA, the objectives and principles of the International Organisation of Security Commissions (IOSCO), of which Uganda is a member.

The Bill also seeks to create a Listing Agency as a single entity to scrutinize, certify and approve prospectuses of companies that need to list.  

Lawyer Louis Namwanja Kizito of Pentagon Advocates says that currently, the conditions for approving a prospectus are too hard for companies, the reason many are staying away.

“Look at the telecommunications companies, they would be listing voluntarily and not being compelled by the laws. But the CMA asks for 1 billion shillings to scrutinize and approve a prospectus. It’s too expensive!” But the ministry says there is no need for a duplicate agency which would actually be usurping the mandate of CMA.

Par­lia­ment rules re­quire a cer­tifi­cate of fi­nan­cial im­pli­ca­tion signed by the Min­is­ter of Fi­nance show­ing specif­i­cally how it will be im­ple­mented to fit into the gov­ern­ment pro­grammes, as well as the source of fi­nanc­ing, the to­tal cost needed and how it will af­fect the ex­ist­ing bud­get.

The lawyer contends that as per the rules of procedure of Parliament, any Bill that does not get the Certificate of Financial Implications after 60 days may be provided for tabling on the order paper.

On May 25, 2023, the Clerk to Parliament wrote to the ministry requesting for a Letter of Financial Clearance to enable the presentation of the Bill to Parliament for discussion.

On July 13, the State Minister for Finance, Henry Musasizi, replied informing parliament of the decision not to grant the certificate, reminding that the ministry had already informed the Speaker of their intention to Amend the Capital Markets Authority (CMA) Act.Cap.84 “in order to create vibrant Capital Markets in Uganda.”

On the Bill’s proposal to increase the transparency of the Authority and limit the powers of the Capital Markets Authority to the regulation of the conduct of approved persons, the Ministry says that would impose a new regulatory structure for the Authority, yet there are adequate regulatory measures in place already.

“The Bank of Uganda, the Regulatory Authority, the Uganda Retirement Benefits Regulatory Authority, the Uganda Microfinance Regulatory Authority, all oversee the conduct of business regulations the economy,” it says. Kizito says that the ministry’s response is evidence that they do want the Bill amended, but adds that they do not understand the technical subject of the stock market which is evolving with technology.

On crypto assets, Kizito says there is a need to regulate the market and that this should be a function of the capital markets regulator, not the Bank of Uganda. “These are assets, people are raising capital from the industry and storing value through tokenization of assets,” he says.

The ministry says the crypto business is not legal in Uganda, with most people yet to understand, and therefore it cannot be regulated.

“The application of Virtual Assets remains less understood by both the regulators and the public, and spans beyond the operations of the Capital Markets to include other products such as payroll, land, and utility management among others”. It adds some other countries like Mauritius and the United Arab Republic have implemented Virtual Assets under a holistic and separate law altogether due to the diverse nature of the concept.

“Virtual Assets are in the form of Crypto-currencies, which are not recognized as legal tender in Uganda. Like Crypto-currencies, tokenization may therefore, be used to effect anonymous electronic payments, which contradicts the Anti-Money Laundering Act, 2013 (as amended); specifically, Know Your Customer, and Customer Due Diligence,” the ministry argues.

It adds that Virtual Assets require an established ICT infrastructure framework and the capacity of the regulator (CMA) in order to protect both the investors and issuers, yet the role of regulating this technology is the mandate of the Ministry of Information, Communication Technology, and National Guidance. The letter says that this kind of infrastructure has huge financial implications not stated in the Bill.

“This is therefore, to inform you that this Ministry has undertaken a comprehensive review of Capital Markets operations in Uganda and accordingly developed a comprehensive Cabinet Memorandum to address both legal, governance, compliance and other policy challenges in order to strengthen the Capital Markets operations in Uganda.”

Crypto assets business has been a controversial topic with part of the government led by BOU and the ministry is highly opposed to its legalization while President Yoweri Museveni wants the concept studied comprehensively for possible introduction as part of the financial sector. The ability for it to operate worldwide without a central regulation is the main source of fear by those opposed to it thinking it will abet money laundering.

Lawyer Kizito says that unfortunately, those who are supposed to act do not understand how it works.  

He says the lack of regulation has ensured that it operates underground with translation worth billions of shillings going on without the government’s knowledge.

This view is supported by the Financial Action Task Force (FATF), the global money laundering and terrorist financing watchdog which recognizes the importance of crypto assets.  “They have the scope to make payments easier, faster and cheaper, and provide alternative methods for those without access to regular financial products,” FATF.

It however admits that most countries have no regulation of it, while they have the potential to become worthless and are vulnerable to cyberattacks and scams. “Without proper regulation, virtual assets also risk becoming a safe haven for the financial transactions of criminals and terrorists. Countries need to fully and effectively implement the FATF’s Standards for virtual assets as a priority.”

The organization to which Uganda also subscribes also advises that virtual asset providers need to carry out the same preventive measures as financial institutions, such as customer due diligence, record keeping, and suspicious transaction reporting. “This will ensure transparency of virtual asset transactions and keep funds with links to crime and terrorism out of the crypto sphere.”

Lawyer Kizito, who also represents MP Nabeta warns that the country is better off either allowing and regulating the industry or banning it completely like countries like Kuwait have done. Closer, he says countries like Kenya, Botswana, and Namibia have completed regulatory frameworks, so Uganda can benchmark. He also allays fears that the crypto business cannot be monitored.

“While you may not be able to attack a face to the one transacting, you can see that there is a transaction happening which can be tracked from source to destination.” The minister’s letter says that the Cabinet Memo has already been approved by the top technical Management and shall be submitted to Cabinet for consideration after clearance by the top management of this Ministry.

“In view of the above, this ministry is unable to issue the requested Letter of Financial Clearance,” said Musasizi. Asked what the way forward is, Kizito says the fate of Bill I is now in the hands of Parliament. It is for this reason that MP Nabeta hopes to table the Bill this week.

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