By Geda Yoseph, Associate at DMLF
Bitcoin is the first decentralized digital currency that allows peer-to-peer transfers without any intermediaries such as banks, governments, agents, or brokers, using the underlying technology of blockchain. Anyone around the world on the network can transfer Bitcoins to someone else on the network regardless of geographic location; you just need to just open an account on the Bitcoin network and have some Bitcoins in it, and then you can transfer those Bitcoins. Bitcoin can be used for online purchases and or as an investment instrument. Primarily it’s used to buy goods and services. On the other hand, Bitcoin mining refers to the process of validating and recording transactions on the Bitcoin network. The primary purpose of Bitcoin mining is twofold: validating transactions to prevent fraud and adding new blocks to the blockchain, thereby creating new Bitcoins in a decentralized manner.
Trading of Bitcoins and other cryptocurrencies remains mostly as an unregulated activity. Cryptocurrencies have three core characteristics: decentralized, unregulated, and quasi-anonymity. However, this does not mean that cryptocurrencies do not have self-regulation protocols. Cryptocurrencies such as Bitcoin have their own self-regulating protocol. Bitcoin is an internet-based cryptocurrency. Individuals can earn Bitcoin by trading, mining,and payment for services. As of January 2020, over 160 international branded companies accept Bitcoin for their services and products. This indicates that cryptocurrencies are becoming the payment system of future generations. Bitcoin was launched in 2009, for Bitcoin’s first five years, mostly large entrepreneurs and investors had sole control, similar to a monopoly. The mining machines placed in mining farms are powerful computing equipment with unique software that uses a minimum of about 60 megawatts, enough to power a modern, mid-sized city. Five years of Bitcoin’s monopoly ended with the creation of the Bitclub Network, modeled similar to a public shareholder company.
Advantages of Bitcoin
Both Bitcoin and traditional currency are similar in that both are a store of value, they differ in many ways. First things first, Bitcoin is the first and most recognized cryptocurrency, a digital currency that is secured by cryptography. Bitcoin has several advantages as compared to traditional fiat currencies, assets can be transferred faster on the bitcoin network. The system also has lower transaction fees, because it’s decentralized and there are no intermediaries, and it is cryptographically secure; the identities of the sender and the receiver are kept hidden, and it is impossible to counterfeit or hack the transactions. Plus, all the information is available on a public ledger, so anyone can view the transactions. Hence, Bitcoin plays a significant role in attracting investors from different countries by facilitating financial transactions.
Bitcoin in Ethiopia
Bitcoin is a simple and secure way to enter crypto mining. Ethiopia has now seen Bitcoin networks and clubs, such as Bit Club and AWS Mining, across the country, and more and more people are investing in them. Recently the Ethiopian Government’s investment arm, Ethiopia Investment Holding (EIH) signed a memorandum of understanding with Honk-Kong-based West Data Group’s Center Service PLC to commence mining bitcoin. The partnership is under a general agreement for a groundbreaking $250 million data mining project “that is dedicated to establishing cutting-edge infrastructure for data mining and artificial intelligence training operations in Ethiopia,” according to the EIH. This general agreement will serve as the groundwork for expansion and development of bitcoin in Ethiopia.
Ethiopia to Become the First African Country to Start Bitcoin Mining
The Ethiopian government is working effectively on bitcoin mining; according to data from Bitcoin mining services company Luxor Technologies, in 2023, Ethiopia ranked fourth behind the USA, Hong Kong, and Asia as one of the top destinations for Bitcoin mining rigs. Russian bitcoin mining company Bitcluster has already built the first 120 MW bitcoin mining facility, and companies such as Hashlabs Mining have started building bitcoin mines in Ethiopia for their global clients. Ethiopia is positioning itself as a leader in the data center space in Africa, which is estimated to grow to $5.4 billion by 2027, according to Aritzon Advisory and Intelligence. This development aims to drive economic growth by leveraging technology and energy sources to attract foreign investments. Despite the ban on crypto trading in the country, 2022 saw the ratification of favorable data mining laws that permit “high-performance computing” and “data mining,” which is where bitcoin mining falls under. In the last two years, this has opened the floodgates to miners seeking its comparatively positive reception to bitcoin mining, coupled with its abundance of energy sources chiefly hydro to its optimal weather and cheap energy costs. The economic benefits of Ethiopia strategically leveraging its abundant energy resources for Bitcoin mining are vast and far-reaching. It is only a matter of time before other African nations join the bandwagon. Bitcoin mining will ultimately be a pivotal tool in addressing the economic challenges in Ethiopia.
Regulation of Bitcoins in Ethiopia
Regulation of bitcoin is very essential unless it can be exposed to several risks. According to Ethiopia’s national payment legal norms, the use of currency, not issued and authorized by the National Bank of Ethiopia, is not allowed. However, the nature of Bitcoin is decentralized antithetical to the existing centralized structure of monetary and financial regulations. As cryptocurrencies are not issued and governed by any central authority, it could be argued that bitcoins are outlawed in Ethiopia. However, recent developments do not seem to support this conclusion because the Minutes of Understanding (MoU) signed between the Minister of Science and Technology and IOHK implies the interest of the government of Ethiopia to introduce the payment system of cryptocurrencies. In May 2018, (EMoST) Ethiopian Ministry of Science and Technology’s chief declared a partnership with one of the world’s foremost cryptocurrencies suppliers. A Memorandum of Understanding (MoU) with Input Output Hong Kong, a company based in Hong Kong, China, for the utilization of a blockchain application platform called Cardano, a type of blockchain record management platform used in Ada cryptocurrency. In this case, blockchain will be used to trace Ethiopian coffee along the value chain, applying genetic sampling to classify species, origin, and identify pesticides and exposure to any chemicals leading to the authentication of the coffee. Ethiopian Investment Holding (EIH) also signed a memorandum of understanding with Honk-Kong-based West Data Group’s Center Service PLC to commence mining bitcoin.
The current legal framework in Ethiopia with regard to Bitcoin
In order to determine the legal status of bitcoin under the current Ethiopian legal framework, it is important to review the proclamation that establish the national bank ,the national payment system proclamation and proclamation that establish Information Network Security Administration (INSA).According to the National Bank of Ethiopia Establishment Proclamation, Proclamation No. 591/2008, Article 5(1), the National Bank have the power and duties to coin, print, or cause to be coined, printed, and circulated the legal tender currency. This provision does not talk about bitcoin and other cryptocurrencies .The national bank of Ethiopia also made a statement regarding cryptocurrencies in 2022, which states that the use of Bitcoin and other digital currencies for transactions is illegal in Ethiopia, warning that violators will face strict action. The National Bank of Ethiopia (NBE) also added that it will take “legal measures” against anyone found to be using cryptocurrencies for transactions in the country. “Birr is the only legal currency in Ethiopia, and all financial transactions shall be effected through it’’. The NBE stressed that there is still no officially recognized cryptocurrency exchange in Ethiopia. Following the National Bank’s announcement in 2022 that cryptocurrencies are unlawful, Ethiopia has started registering cryptocurrency businesses with its national cyber security agency. The Information Network Security Administration (INSA) stated on August 24, 2022, that “individuals and entities” involved in “crypto operations” must register with the authority within 10 days. The “urgent notice” comes after parliament amended INSA’s mandate to “regulate and control cryptographic products and their transactions. Proclamation No. 808/2013, which established the Information Network Security Administration (INSA), under Article 6(9), provides that the agency shall have the powers and duties to regulate cryptographic products and their transactions, set necessary criteria and develop operating procedures, and develop and implement cryptography infrastructure. INSA invokes Article 6 (9) of its establishment Proclamation (Proclamation No. 808/2013). This provision gives it the power to “regulate cryptographic products and their transactions, set necessary criteria for establishing operating procedures, and develop and implement cryptographic infrastructure
The status of bitcoin under the current Ethiopian legal framework is unclear, and it is impossible to govern bitcoin and other cryptocurrency by the current existing laws. The current Ethiopian national bank establishment proclamation does not recognize bitcoin. Hence, it is important to amend the law to recognize and determine the status of bitcoin under Ethiopian law.
The other legal framework is the Ethiopian National Payment System Proclamation (Amendment) Proclamation No. 1282/2022, which, under Article 2(20), defines a payment instrument as any instrument, whether tangible or intangible, that is issued against the receipt of a fund equivalent in Ethiopian Birr that enables a person to obtain money, goods, or services or to otherwise make payments, which include electronic money and cards. This definition is based on traditional currencies rather than emerging cryptocurrencies like bitcoin. The status of bitcoin is unclear under the current Ethiopian national payment system. Article 5 of this proclamation also states that no person except the National Bank may be an operator or issuer of payment instruments unless such person is licensed or authorized by the National Bank. It’s impossible to consider bitcoin as a national payment instrument under the current legal framework of Ethiopia. Under the current existing legal framework, the national bank of Ethiopia also has no system for the registration and licensing of crypto-asset service providers. Hence, it is important to revisit and amend our laws in order to be compliant with new emerging technologies and trends with regard to bitcoin.
Cryptocurrency payment in general, specifically the bitcoin, system is growing in Ethiopia. However, the legal regime on the national payment system has deficiencies to govern it. The prevailing experience reveals that individuals and groups are engaged in the business/payment system of cryptocurrencies without registration and securing license from the National Bank of Ethiopia.
Conclusion and Recommendation
The government of Ethiopia is taking several institutional and regulatory measures to attract foreign investors. Ethiopian Investment Holdings signed a memorandum of understanding with Hong Kong-based West Data Group’s Center Service PLC to commence mining bitcoin. This general agreement will serve as the groundwork for expansion and development of bitcoin in Ethiopia. This will be a good move for attracting foreign investors and bringing economic development to the country. In this area, huge economic transactions can be transacted, and investors from different countries can also invest and generate profit. However, effective regulatory as well as other institutional measurements are essential. The measurement that has recently been taken by Ethiopian Investment Holding is very important in the development of bitcoin. Generally, the laws enacted to govern the national payment system and to suppress and prevent money laundering and terrorist financing are aimed at regulating fiat money. There are strategic deficiencies in the country’s legal norms to govern Bitcoin. Ethiopia has not enacted a law that allows the use of cryptocurrencies. Nor has it conducted a risk assessment with regard to the problems that can emanate from cryptocurrencies. However, Bitcoiners are engaged in expanding the business in the country. They inspire Ethiopians to partake in the Bitcoin business either by buying Bitcoin or through engagement in mining. Signing a memorandum of understanding with different organs is not enough; providing an effective, efficient, and adequate legal and institutional framework for the implementation and regulation of the agreement is very important. There is thus the need for caveats because Bitcoiners are engaged in the business without a license or in the absence of an established mechanism for the licensing and registration of virtual asset service providers. The National Bank of Ethiopia has to establish a system of registration and licensing of crypto-asset service providers. Thus, the Ethiopian government should consider enacting a law that comprehensively governs bitcoin. Along with this, improving the capabilities of financial institutions, law enforcement agencies, and regulatory authorities is crucial to deal with the bitcoin system.
Credit for Vartan, from Pan Consultium Cyprus for initiating the idea.
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