Remarks by Prof. Emmanuel Tumusiime-Mutebile,
Governor, Bank of Uganda
At the Africa Blockchain Conference
Serena Hotel, Kampala
May 23, 2018
Your Excellence, the President of Uganda,
Ladies and Gentlemen,
It gives me great pleasure to join you today for the Africa Blockchain Conference 2018. I take note that the conference has attracted both local and international participants. In particular, I wish to extend a special welcome to all international participants and I hope that you will have a good stay in our beautiful city of Kampala.
I would like to thank the Blockchain Association of Uganda together with the partnering institutions for organising this conference. The Africa Blockchain Conference offers an opportunity for practitioners, scholars, policymakers and private sector actors to discuss, share experiences and exchange views about the blockchain technology.
Cryptocurrencies have provided the main application of blockchain technology to date. I need to mention the emergence of cryptocurrencies such as bitcoin, have led us to revisit two fundamental questions:
1) What are functions of a currency?
2) What are the requirements for a credible currency?
As you all know, a currency performs three functions which are essential to the functioning of the economy: a store of value, a medium of exchange and a unit of account.
A store of value means that a currency can be used by the public to hold their savings, confident that the value will not be eroded over time. A medium of exchange means that the currency can be used by the public, within a given jurisdiction, and will be accepted as a means of payment by everyone in that jurisdiction. A unit of account means that the currency can be used to denote the value of goods, services and assets so that the value is known by everyone.
There are two requirements for the currency to perform the three essential functions.
First of all, there must be legal and institutional arrangements, which give the currency privileges as a medium of exchange within a given jurisdiction. For example the Uganda shilling has the status of legal tender within the territory of the Republic of Uganda.
Secondly, there must be institutional arrangements to ensure the stability of the value of the currency, both in short term and long term. The institutional arrangements usually confer onto a central bank the monopoly to issue currency and give the central bank the mandate to pursue monetary policies which prioritise the stability of the value of the currency.
Having a national (or regional) currency, which can perform these three essential functions, can provide enormous benefits for the economy and the society at large. One only has to study examples of countries, which have lacked a currency that can perform each of these functions to understand how important they are. For example, in Zimbabwe, the value of the Zimbabwean dollar was debauched by virtually unlimited printing of money so that hyperinflation rendered it worthless as a store of value and unit of account.
Eventually the Zimbabwean government replaced its own currency with the US dollar in 2009, and although the US dollar serves as an adequate store of value and unit of account, it is serious deficient as a medium of exchange within Zimbabwe because the country cannot obtain sufficient dollar notes to meet the demand from the public. Consequently, there are severe cash shortages in Zimbabwe, which are disruptive for its economy.
No cryptocurrency can match a well-managed national or regional currency. Cryptocurrencies do not have the privileges of legal tender and are not backed by a central bank, which ensures that supply of currency is always adequate to meet demand. Furthermore, there are no external mechanisms for backing cryptocurrencies to ensure they have a stable value. Consequently cryptocurrencies are subject to extreme price volatility, which renders them ineffective as a store of value or unit of account.
The Governor of the Bank of England, Mark Carney, noted in a recent speech that: “the average volatility of the top 10 cryptocurrencies by market capitalisation was 25 times that of US equities market in 2017.” It is therefore not surprising that cryptocurrencies currently command only a negligible share of e-commerce payments worldwide.
Where does this leave cryptocurrencies and what should be the policy of central banks towards them? As I have already pointed out, cryptocurrencies lack the necessary prerequisites to perform the essential functions of means of payment, store of value and unit of account. Cryptocurrencies perform only two functions. First, they allow payments, especially crossborder payments, to be made anonymously, thereby facilitating illicit transactions such as money laundering or the financing of crime.
Second, cryptocurrencies offer an avenue for speculation. However, unlike many other assets, which attract speculators, such as gold or equities, cryptocurrencies have no intrinsic value.
Their current value depends entirely on the subjective beliefs of cryptocurrency traders about what their future value will be. In the long term, unless cryptocurrencies can command widespread acceptance as a medium of exchange, demand for them will be negligible and their value will therefore fall to zero. The stratospheric prices at which cryptocurrencies have recently traded are unlikely to be sustainable.
People who have invested their savings in cryptocurrencies risk getting badly burned when the bubble bursts.
In view of the risks related to cryptocurrencies, Bank of Uganda issued warning to the users of cryptocurrencies to beware of these risks.
I thought I would use this opportunity to share our views about cryptocurrencies but also remind you that the emergence of cryptocurrencies should not divert us from the important role central banks play as stewards of public trust.
We are here today to talk about blockchain technology and the opportunity it offers. Please note that cryptocurrencies and the technology that supports it, which is blockchain are two different things. Our focus today is on blockchain and not cryptocurrency.
Beyond its application in cryptocurrency, blockchain is viewed as a revolutionary technology with the potential to change how we manage data and do business.
I am aware that across the globe, institutions and governments are exploring possibilities of utilising this technology beyond its current application in cryptocurrencies such as bitcoin. Institutions and governments are looking into using this technology in asset management, insurance, payments, voting system, identity management to mention but a few.
I hope that during this conference you will have time to explore the potential uses of this technology and the opportunity it offers.
Thank you for listening to me and I wish you successful deliberations.