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CONSULTING
LEGAL
AND REGULATORY ASPECTS OF
BLOCKCHAIN
& SMART CONTRACTS IN UGANDA
ii
LEGAL. ADVISORY. CONSULTING
The network 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.
• Regulatory compliance
Regulatory vetting and development of industry standards are necessary but
are still in very early development phases. The regulators are actively studying
the technology, but targeted regulatory frameworks for Distribution Ledgers
(DL) are yet to emerge. Sectors such as banking and finance,
telecommunications, aviation, petroleum, and pharmaceuticals are highly
regulated. Introduction of blockchain systems may require seeking a “no
objection” from the relevant regulatory entity.
In the financial space, both the Central Bank Governor and the CEO of the
Capital Markets Authority (CMA) have expressed public support for
blockchain technology. Efforts are underway to create a regulatory sandbox
for fintechs. The Uganda Communications Commission (UCC) has already
established a sandbox regime for the communications industry.
- 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.
• 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 study-
ing 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.
SMART CONTRACTS
Blockchain enables execution of “smart contracts”. These are automated
self-executing contracts/agreements executed through computer codes upon
fulfilment of the agreed terms thus eliminating intermediaries. They are
programmable applications that manage transactions conducted online. Since
smart contracts are pre-written coding rules, they can be customized to
manage financial interactions between machines, humans, regulators,
government, and financial service providers.
• Fourthly, due diligence and integrity of data challenges will emerge. Smart
contracts require up-to-date regulatory data and records. There will be unique
circumstances arising from distributed ledger systems. Wrong or inaccurate
data entries will be replicated across the entire chain. Therefore, public
registries such as the lands registry, Uganda Registration Services Bureau
(URSB), Uganda Revenue Authority (URA), National Information and
Registration Authority (NIRA), etc will have to enhance their data entry and
verification systems to ensure effective data quality and real time information
updates.
• Legal amendments and changes during the smart contract process may also
make their adoption and execution difficult. Uganda’s legal system is rapidly
evolving as it tries to adapt to the changing political, economic and social
environment. In most cases, there is regulatory uncertainty and policy reversal
due to inconsistent application of the existing laws and policies. Smart
contracts drafters will be more likely to write smart contract terms that are
variable to accommodate future changes in the law.
ASSOCIATES
Shawin Mabiya
Daniel Bill Opio
Moses Baguma
Emmanuel Okiror
Bennett Alinda
Roman Kato
CONSULTANTS
John Goslino
Roland Mosler
Davidson Conner
LEGAL. ADVISORY. CONSULTING