Now, picture Amina, a single mother in rural Kenya. She invested her life’s savings on a DeFi platform that promised to give her astronomical returns, seduced by the hope of finally leaving behind the shackles of poverty. She was among 8,000 customers who lost everything when the platform suddenly collapsed. It was a fraudulent scheme that exploited people’s desperation and flourished in the storm of uncontrolled crypto markets. This isn't an isolated incident; it's a symptom of a larger problem: DeFi, touted as a tool for financial inclusion, is increasingly becoming a vehicle for exacerbating wealth inequality in Africa.

Is DeFi Just Digital Colonialism?

We've been sold a dream: crypto as a democratizing force, a way to bypass traditional financial systems and empower the underserved. The story on the ground in Africa tells a different tale. The recently released Bank for International Settlements (BIS) report manages to spotlight this disparity in an alarming way. These features could lead crypto markets to worsen, not improve, wealth inequality. Western venture capitalists and tech entrepreneurs rejoice in their role in “disrupting” finance. They fail to consider the real world effects that their innovations have on more vulnerable communities.

Think about it. Who really benefits from DeFi in Africa? Amina’s not the only one having a hard time. Millions do not have the financial literacy, digital access, or mechanisms for legal recourse required to traverse the complicated and frequently exploitative terrain. Regulatory loopholes are fully exploited by early adopters and tech-savvy elites. Even scammers get in the game, taking advantage of the lack of information for their own gain. This latest breed of digital colonialism preys on the most vulnerable. Instead, it siphons their wealth upwards, further enriching the already privileged.

The FTX Collapse: A Microcosm of Exploitation

The BIS cites the FTX collapse as a prime example of how larger crypto investors ("whales") prey on the emotions of less sophisticated retail investors ("krill"). Similarly, during the 2022 price correction, wallets with over 1000 bitcoin sold into a rising price environment supported by retail investors purchasing. This isn't just an abstract economic principle; it's a human tragedy playing out in real-time.

Now, multiply that entire dynamic tenfold, and you get just a taste of the African context. So these sophisticated crypto traders use their insider information, advanced tools and tactics they’ve honed over years of illegal pump and dumps to manipulate the market. They take advantage of the ignorance of the average Africans, who are only working hard to survive. The result? A chart showing how one financial innovation is really a transfer of wealth from the poor to the rich.

Stablecoins: Stable In What Sense?

Stablecoins, usually hailed as the cornerstone of the DeFi ecosystem, are far from stable for most Africans. The BIS rightly calls for targeted regulation of stablecoins, focusing on stability, reserve asset requirements, and ensuring redemption for US dollars during market stress. What occurs when these so-called “stable” assets turn out to be anything but that?

Consider this: a stablecoin pegged to the US dollar is only as stable as the US dollar's access to those in Africa. Currency fluctuations and transaction fees can erode this value, making stablecoins complicated and inconclusive solutions. As a consequence, everyday Africans can end up owning assets that are practically worthless. This is no stability; it’s a financial mirage that disappears in the bright light of reality.

Policy Needs To Be Proactive, Not Reactive

US House Financial Services Committee has passed the STABLE Act. Consumer protection This legislation would create a clear, consistent regulatory framework for dollar-denominated payment stablecoins, emphasizing transparency and consumer protection. The Senate Banking Committee has approved the GENIUS Act. This legislation takes positive steps to establish appropriate levels of collateralization for each type of stablecoin and requires stablecoin issuers to be fully subject to Anti-Money Laundering (AML) laws.

What we need instead, are more proactive regulatory interventions that take into account the specific needs, vulnerabilities and challenges of African communities. This includes:

  • Investing in financial literacy programs that empower ordinary Africans to make informed decisions about crypto and DeFi.
  • Strengthening consumer protection laws to hold crypto companies accountable for scams and fraud.
  • Promoting digital inclusion by expanding access to reliable internet and affordable devices.
  • Collaborating with African governments to develop regulatory frameworks that foster innovation while protecting vulnerable populations.

We’re not willing to let DeFi increase the wealth gap in Africa and just sit on the sidelines. It's time to demand greater transparency and accountability from crypto companies, support policies that promote financial inclusion, and challenge the narrative that crypto is a universally beneficial tool. The future of Africa depends on it.