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LEGAL. ADVISORY.

CONSULTING

LEGAL
AND REGULATORY ASPECTS OF

BLOCKCHAIN
& SMART CONTRACTS IN UGANDA
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LEGAL. ADVISORY. CONSULTING

Uganda recently hosted the inaugural Africa Blockchain Conference. Our


Partner, Silver Kayondo was a panelist at the event, and our Associate and
CyberLine Director, Daniel Bill Opio made it for the pitch session. As part of
Ortus LLP’s Blockchain and Artificial Intelligence practice team, they share
their thoughts on the legal and regulatory aspects of blockchain in the
Ugandan context.

Michael Crosby et al. define blockchain as 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 the public ledger is
verified by consensus of a majority of the participants in the system.

Bitcoin (a cryptocurrency) is the most popular example that is intrinsically tied


to blockchain technology. Bitcoin and blockchain are often intermixed, but
nonetheless, blockchain technology itself is non-controversial, has worked
flawlessly over the years and 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 Ethere-
um blockchain.
As the diagram above enunciates, each block contains four pieces of
immutable information/data called the ‘hash’ of the previous block, a
summarized version of a specific transaction, a time stamp, and the “Proof of
Work” used to create that specific secure block making it is extremely difficult
to alter the information once it is uploaded on the blockchain..

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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.

The Ugandan context


Use cases for blockchain in Uganda are on the rise. At the Africa Blockchain
conference, there were demonstrations of blockchain being deployed in
fighting counterfeit drugs and medicines. A team from BitLand also interacted
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.
The Uganda government spearheaded by the Ministry of ICT has moved to
constitute a “National Blockchain Taskforce” to come up with a policy to
streamline use of blockchain in Uganda. It is anticipated that after the policy
has been crafted, adequate legislation will be enacted to augment the policy
framework. Domestic challenges like weak public institutional capability,
poor data and records management systems, poor infrastructure, tax collec-
tion 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.

Legal and Regulatory Aspects of Blockchain & Smart Contracts in Uganda


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LEGAL. ADVISORY. CONSULTING

Industries where blockchain can be deployed

• 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
• Voting and Political Management
• E-commerce and Digitization
• Real estate and property management
• Electronic Signatures Act of 2011 (ESA)
• Electronic Transactions Act of 2011 (ETA)

Legal and Regulatory issues of Blockchain in the


Ugandan context
Section 43 of the ESA enjoins certification service providers and subscribers to
only use trustworthy systems in their operations. Since blockchain is automa-
tion 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 ETA.

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LEGAL. ADVISORY. CONSULTING

• 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.

• 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.

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LEGAL. ADVISORY. CONSULTING

- Another area to address pertains to consumer protection within the block-


chain ecosystem. For instance, consumers have no control over the function-
ing and control of permissionless/public blockchain systems. In cases such as
inaccurate/defective account settlements, erroneous money transfers, wrong-
ful counter-party deductions, etc, the consumers will remain exposed to
losses. The Ugandan digital framework must have inbuilt risk allocation strate-
gies 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, bank-
ing 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 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.

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LEGAL. ADVISORY. CONSULTING

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.

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LEGAL. ADVISORY. CONSULTING

The Ugandan Contracts Act of 2010 defines a contract as an agreement made


with the free consent of parties with capacity to contract for a lawful consider-
ation and with a lawful object with the intention to be legally bound. Data
messages are recognized forms of contracts. The ETA defines data messages as
data generated, sent, received or stored by computer means. This includes
voice (where voice recognition technology is used in automated transactions)
and stored records. Therefore, there is a statutory underpinning for smart
contracts in Uganda. Acceptance can be effected through clickwraps or click-
throughs of the contractual terms.

Challenges and opportunities


• Monitoring and enforcement of performance in cases of implied conditions
and unforeseen circumstances will be problematic because it is difficult for
parties to foresee all contingencies and specifically provide for them in
self-executing format. Therefore, some human element will still be needed to
ascertain compliance with events that occur within the practical realm (real
world) to which smart contracts apply.

• Another challenge relates to enforcement. Smart contracts can be


categorized into two groups. These are “strong smart contracts” and “weak
smart contracts”. Strong smart contracts have prohibitive costs associated with
revocation and modification, while weak smart contracts do not.
In interpretation, courts or arbitral tribunals may alter the intention of the
parties unintentionally and unknowingly due to adherence to rules of
precedent and ambiguity of language. Furthermore, it is also difficult to make
personal service contracts amenable to computer coded control.

• The incentive structure for smart contracts (tokens) will be problematic to


enforce under the existing currency rules. Smart contracts require that specific
information on the parties, their obligations, time, delivery, payment, escrow
obligations, collateral management, etc be recorded in the code. To achieve
this, the Ethereum platform was set up. Ethereum is a decentralized platform
that runs smart contracts as programmed applications without any possibility
of downtime, censorship, fraud or third party manipulation. Smart contracts
on Ethereum use the proprietary Ether cryptocurrency as consideration.
However, ether and other cryptocurrencies such as Bitcoin have not yet been
recognized in Uganda and their market capitalization rules are non-existent.

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LEGAL. ADVISORY. CONSULTING

• 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.

• Lastly, certification and standards enforcement in blockchain and smart


contracts training will form a core regulatory function. The National
Information Technology Authority, Uganda Act of 2009 and the regulations
thereunder empower the National Information Technology Authority, Uganda
(NITA-U) to certify providers of information technology products and services,
and authenticate information technology trainings.

Legal and Regulatory Aspects of Blockchain & Smart Contracts in Uganda


Conclusion
By and large, blockchain technology and smart contracts will present a myriad
of legal and regulatory issues covering areas such as licensing; identification
and authorization; privacy and data protection; fraud; tax; consumer protec-
tion; competition/anti-trust; professional negligence claims; jurisdictional
challenges; intellectual property; among others. Solutions that are able to
onboard a critical mass of Ugandans through interoperability, ease of use,
affordable access, implementation and maintenance costs will most likely find
it easier to scale and adapt to the existing framework. It remains to be seen
how Ugandan courts and arbitral tribunals will resolve the issues arising from
these emerging technologies.
THE
TEAM
PARTNERS
Silver Kayondo
GENERAL PARTNER
LLB (Hons) (UCU) LLM (Pretoria)
Dip.LP (LDC)

ASSOCIATES
Shawin Mabiya
Daniel Bill Opio
Moses Baguma
Emmanuel Okiror
Bennett Alinda
Roman Kato

CONSULTANTS
John Goslino
Roland Mosler
Davidson Conner
LEGAL. ADVISORY. CONSULTING

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Plot 26, Buganda Road
P.O. Box 31845, Kampala

Off: +256 779 334 187


ks@ortusadvocates.com
www.ortusadvocates.com

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