Imagine Amina, a young Kenyan entrepreneur. She had a vision: to use a microloan DeFi platform to empower women in her village, providing them with the capital to start small businesses. Her project was innovative. It was hopeful. But it failed. The platform she decided to use had unknowingly used money from a crypto wallet connected to a sanctioned Russia actor. This occurrence was not the result of unmet demand or because the pilots were poorly executed. Her project was poisoned and it all went down the tubes.
This is the dark secret of DeFi, a secret that's particularly devastating for Africa: the ease with which sanctioned crypto undermines legitimate financial innovation and ruins lives.
Is DeFi Really Decentralized Freedom?
DeFi claims to offer everyone—unbanked and underbanked alike—financial freedom, a borderless, permissionless utopia. For the vast majority of Africans, this promise is still far from realized. Why? Legitimate users are drawn to DeFi because of its decentralized nature and limited KYC/AML requirements. Ironically, it’s these very same features that provide widespread cover to bad actors. Think about it: a system designed to bypass traditional finance is inherently attractive to those seeking to evade scrutiny.
The bitsCrunch data reveals the ugly truth: hundreds of sanctioned wallets are actively exploiting DeFi platforms like Uniswap, dYdX, and Yearn Finance. Hundreds of billions of dollars flow through these channels, evading lawful auditing by layers upon layers of sub-transactions. And as regulators in the US and Europe continue to come to terms with these implications, it’s African communities that face the consequences.
These users are usually the most unaware about the dangers, and the quickest to feel the effects. Projects get exploited in rug pulls, platforms just collapse. In the end, the promise of financial inclusion becomes a waking nightmare of forfeited savings and broken faith. It is a scandal.
Forgotten Voices, Crushed Dreams
Many believe that crypto holds the key to transforming finance in Africa. It can leapfrog traditional banking infrastructure and empower the unbanked. There is truth to that. We rarely hear about the other side of the story: the African developers struggling to build legitimate projects in a minefield of tainted funds, the small business owners who lose everything to scams facilitated by anonymous crypto transactions, or the communities whose trust in decentralized finance is shattered by these experiences.
Doing business the right way is becoming harder. Or you could be perpetually scared that your platform would be blacklisted for inadvertently dealing with sanctioned assets. Now just imagine the terror of knowing that your entire account could be frozen. Your business might end up wiped out simply because someone else decided to misbehave on the same DeFi protocol. This is the land of milk and honey for most African crypto entrepreneurs.
That’s what I learned from David, a software developer based in Lagos. He’s now developing a blockchain-based remittance platform that will enable Nigerians to send money home more affordably from abroad. In response, he told them that, as a result, he had to give up on his project. This decision was precipitated by him finding that most of the platform’s trading volume was going to wallets associated with a notorious money-laundering ring.
"We were so excited about the potential to help our community," David said, his voice heavy with disappointment. We found very quickly that we could not hope to build something sustainable on such a thin and unstable ground. We were operating under the false premise of a game we’d never be able to win.
Are we really prepared to allow the aspirations of innovators like David be stymied by the actions of these sanctioned entities.
Regulation: A Shield, Not a Chain
The knee jerk response to alarmist stories like this one above is usually to demand more regulation, to kill DeFi with fire. That would be a mistake. There’s no question that DeFi can help democratize African communities, create financial inclusion, and ensure the development of economic opportunities found in the creation of wealth. The challenge lies in striking the right balance between protecting us from such risks while not killing the innovation that will drive our future.
It’s time for a more nuanced approach, one that understands the distinct challenges of African crypto users. This means:
- Tailored Education Programs: Educating users about the risks of interacting with sanctioned wallets and providing them with the tools to identify and avoid them.
- Community-Led Compliance Initiatives: Empowering local communities to develop their own compliance standards and best practices.
- Collaboration Between African Regulators and the Global Crypto Community: Working together to develop regulations that are both effective and equitable.
As responsible global citizens, it’s time to ask that DeFi platforms adopt stricter AML/KYC practices. It’s well past time to hold centralized exchanges responsible for the funds that pass through their networks. And it’s high time to make sure that African voices are at the table in this important global regulatory debate.
We can’t let DeFi’s ugly secret steal Africa’s semester of promise. Join us in creating a more inclusive, more secure, and more equitable crypto ecosystem for all. Because the future of finance should leave no one behind.
The Cost of inaction:
| Consequence | Description |
|---|---|
| Stifled Innovation | Legitimate African crypto projects struggle to attract investment and gain traction due to concerns about regulatory uncertainty and association with illicit funds. |
| Reduced Financial Inclusion | Vulnerable communities miss out on the potential benefits of DeFi due to fear of scams and lack of trust in the ecosystem. |
| Increased Economic Inequality | Illicit actors exploit DeFi to launder money and evade sanctions, further enriching themselves at the expense of legitimate users and businesses. |
| Erosion of Trust | The prevalence of scams and illicit activity erodes trust in the crypto ecosystem, hindering its long-term adoption and growth in Africa. |
The time to act is now.
