Cryptocurrencies and Political Financing in Uganda

A shop trading in digital currencies commonly known as cryptocurrencies has opened in Uganda’s capital, Kampala and it may not be long before it opens outlets in other cities across the country. This has been a long time in the making because over the past four years, cryptocurrencies have been gaining traction in Uganda.

There are now more than 1,000 digital currencies in the market, which is dominated by bitcoin (Trading View 2018). Their use is increasing in all realms, including political activities such as election campaign financing.  The digital currency shop in Uganda is so far trading in Bitcoin, Chainlink, and Tether among others.

What are Crypto Currencies?

Cryptocurrencies are based on a series of cryptographic protocols that digitally verify financial transactions. They are designed to prioritise privacy and anonymity rather than transparency. Whereas the origin and destination of transactions (their addresses) are stored in a public ledger, the identity of the people involved in the transactions may not be traceable, depending on the type of cryptocurrency.

Until now, world governments are undecided on whether to consider cryptocurrencies in the same category as other conventional currencies such as the dollar, Euro, Pound, or Yuan, and whether they should be treated as an asset. It is also unclear what the exchange rate is in relation to the other international currencies.

Correlation between Cryptocurrencies and Political Financing

Alliance for Finance Monitoring (ACFIM) shares the view that cryptocurrencies will soon be more widely used in financing political parties and election campaigns in Uganda. This is because the ubiquity of cryptocurrencies gives them the potential to facilitate the smooth flow of anonymous political finance donations from foreign sources to countries where they may either be banned or restricted. Uganda is among the countries that restricts financing of political parties using foreign sources of funding.

Thus, there are several questions regarding the risks and opportunities associated with cryptocurrencies’ potential use in financing politics, as well as the transparency and oversight of such transactions. According to International IDEA, since they are currently (relatively) unregulated, it is unclear in many countries whether political finance transactions using cryptocurrencies are allowed.

Whereas political finance experts and practitioners such as ACFIM still have little understanding of cryptocurrencies in general, and their implications on financing of political parties and election campaigns in particular, relevant government institutions such as the Financial Intelligence Authority (FIA) must move quickly to put in place mechanisms to regulate and control these digital currencies. The reality is that Uganda has no provision in its laws that regulates the use of cryptocurrencies in financing political parties and election campaigns.

Challenges posed by Cryptocurrencies

Cryptocurrencies present several potential challenges and benefits to legislators and oversight agencies working on political finance around the world.

Most cryptocurrencies are designed to prioritize privacy and anonymity, they are volatile and above all, there is a lack of oversight on their transactions.  The anonymity of transactions could facilitate the use of cryptocurrencies to covertly fund politics and illicit activities.

The question is which of the two categories is being traded in Uganda?  If it is the category that thrives on privacy, the Financial Intelligence Authority, Bank of Uganda, and other oversight agencies will face great difficulties in tracking transactions and financial flows of these digital currencies. Thus, cryptocurrency is a sure gateway for “dirty money” to find its way into financing political parties and election campaigns which in the end imperils the country’s sovereignty.

Using cryptocurrencies to finance politics may provide a means to circumvent section 14 of the Political Parties and Organisations Act 2005 (as amended) – restrictions on contributions from foreign sources. Cryptocurrencies can be effectively used to channel foreign contributions and anonymous donations to political parties and candidates as well as be used to beat the existing donation limits from international sources or corporations and single sources, as well as reporting, monitoring, and oversight systems.

The Pros and Cons of Cryptocurrencies

According to the Discussion Paper 2 of 2019 published by International IDEA, cryptocurrencies have the following pros and cons:

• The decentralized nature of cryptocurrencies allows people to circumvent the banking system (Kadyrov and Prokhorov 2018), which creates problems for anti-money laundering (AML) efforts, as well as opportunities to reduce transaction costs. This raises concerns about their potential effects on the flow of money in and out of politics, as well as corruption, money laundering and funding of illicit activities (Gensler 2018).

• Cryptocurrencies’ current levels of price volatility, driven by speculation, erode trust, a key ingredient of any type of financial asset. Cryptocurrencies’ current inability to purchase ‘real’ goods and services, may limit their direct applicability in Uganda’s economy.

• Most early adopters of cryptocurrencies were organized criminals; the shutdown of Silk Road, a digital market for drugs on the dark web, indicates that criminals still use them for business (Demertzis and Wolf 2018: 10; The Economist 2018c). The sheer number of cryptocurrencies has also attracted attention.