The latest episode of the Frontier podcast tackled an important issue facing the growth of Web3 in Africa - building trust through self-regulation.

With several recent incidents of unethical behavior by some builders breaking trust in Web3's potential, the Frontier team stressed the need for the community to step up. Self-regulation is key to ensuring accountability and integrity as the Web3 space develops.

In this episode of The Frontiers!

The team discussed policy ideas like forming an ethics review board, creating standards, and enacting enforcement mechanisms. Getting incentivization right is also crucial - balancing innovation with guidelines that protect users and investors.

We also dove into the recent $2 million debacle involving the cryptocurrency exchange Patricia. More oversight and security audits could have potentially prevented or mitigated the damage.

Overall, this episode highlighted that now is the time for the Web3 community in Africa to have these conversations. The growth of Web3 rests on users and investors trusting its promise. And trust is built through proactive self-regulation.

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Across East Africa, mobile money has become a ubiquitous part of daily life. Services like M-Pesa, Airtel Money, and Tigo Pesa allow people to store and transfer funds easily via their mobile phones. But now, mobile money is colliding with a new technological revolution - Web3.

In recent years, there has been rapidly growing interest and adoption of Web3 applications like cryptocurrencies, NFTs, and blockchain-based services in Africa. But most people are still not familiar or comfortable with crypto wallets, blockchain addresses, and other Web3 concepts.

That's where mobile money comes in. Companies are now looking at ways to build bridges between the familiar mobile money world and the new world of Web3. For example, exchanges are integrating mobile money as an on-ramp, letting users purchase crypto using the mobile money accounts they already understand. Services are leveraging mobile money's vast agent network to facilitate crypto-fiat transactions. And some projects are building fiat-stablecoins pegged to mobile money values.

For Web3 to see mass adoption in Africa, it helps to meet people where they are. And across East Africa, where mobile money usage is skyrocketing, people already have an easy on-ramp to digital financial services in their pockets. Leveraging this existing infrastructure and user familiarity could be key for unlocking wider usage of Web3 applications.

In this episode of The Frontiers!

We sat with Jordan Muthemba, A Blockchain developer to discuss how Web3 could leapfrog across East Africa on the back of mobile money as its trusty steed and its potential to expand financial access and opportunity across Africa.

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For those unfamiliar, Curve is an exchange platform that lets users trade between different stablecoins pegged to the US dollar. It is one of the largest DeFi protocols, with billions locked in its smart contracts.

The exploit involved a previously undiscovered bug in Curve's code which allowed an attacker to manipulate prices and extract funds. Specifically, the hacker took out a flash loan of nearly $550 million in the stablecoin USDT and used it to manipulate Curve's pools and extract other stablecoins at below-market prices.

This exploit reveals a few important points about risks in crypto and DeFi:

1. Smart contract risks are real. Like any software, smart contracts can contain bugs and flaws that attackers can exploit. Rigorous auditing is critical before launching and interacting with these codes.

2. Hot wallets are vulnerable. The exploit targeted hot wallets connected to Curve's protocol. Hot wallets are convenient but less secure than offline cold storage. Avoid keeping too many assets in hot wallets.

3. Counterparty risk exists. When interacting with DeFi protocols, users face counterparty risk if the developers or governance makes a mistake. Always assess risks before supplying protocols.

While disturbing, this exploit is an opportunity to improve. Developers are auditing code, governments are providing oversight to DeFi, and users are learning how to interact safely with these tools. Crypto still holds great promise, but thoughtful precautions are necessary.

Further story of the Curve exploit

On July 30th, Curve Finance suffered hacks on several of its liquidity pools, resulting in over $70 million in losses. This was due to a vulnerability in Vyper, a third-party Python-like programming language for Ethereum smart contracts used by Curve. Vyper had issues where attackers could trick the contracts into incorrectly calculating balances, enabling them to steal funds held in the protocols.

With over 75% of funds already returned, some of the stolen funds were front-run by "white hat" hackers and have since been given back. One prolific MEV (Maximum Extractable Value) bot operator "c0ffeebabe.eth" was involved, having returned funds from other exploits before.

The hacker who attacked the NFT lending platform JPEG'd, sparking a series of other attacks, returned the funds with an encrypted message stating they were not scared of being tracked but did not want to ruin the project. The company still has an active $1.85 million bounty for anyone who can uncover the hacker's identity to recover the remaining funds.

One concern that worried the DeFi ecosystem was contagion risk, especially from lending protocol Aave, which appeared at risk from Curve's CEO's borrowed position. However, the CEO has since added collateral to Aave and paid down nearly $4 million in debt, stabilizing his position.

In the end

The DeFi ecosystem looks to have returned to its healthy state, thanks to the support of its community and various volunteers that worked together to ensure the recovery of funds, although an exploiter remains at large despite the community bounty.

The report details the ongoing regulatory developments globally, with a sample size of over 35 countries

• 40% have regulations in place

• 34.3% have started the process

• 17% have not started the process, and

• Only 9% prohibit crypto.

The report points out that Web 3.0 in Africa is faced with challenges:

• Uncertain regulatory environment

• Low customer/stakeholder awareness

• Reaching scale and profitability

The report points out that only Central Africa Republic designates Bitcoin as a legal tender out of all sub-Saharan countries; While there are some restrictions in others, trading crypto explicitly is banned in 20% of sub-Saharan Africa.

The Report by Geography

On East Africa

The reports estimate that 11.7 million East Africans own cryptocurrencies: 6.1 million in Kenya, 2.3 million in Tanzania, and two million in the DRC.

On Nigeria

The report estimates that over 22 million people, 10.3% of Nigeria’s total population, currently own crypto, and the Nigerian SEC released regulations regarding digital assets in Nigeria, considering them digital tokens that represent assets.

On South-Africa

The report estimates that over 5.8 million people, 9.44% of South Africans, own crypto, and its regulatory body is on a working framework. Starting in January 2023, Binance users in South Africa can withdraw ZAR directly to their bank accounts.

On North-Africa

While Egypt has banned the explicit trading of crypto, it has continued to see increased use. In fact, the Middle East and North Africa region had the fastest-growing crypto market in 2021 and 2022.

Key takeaway

The growth of Web 3.0 in Africa isn't surprising, given the continent's eagerness to access blockchain's many benefits. Its main use in Africa is to protect against inflation by saving in stable USD, bypassing USD transfer limits, and facilitating fast transactions. But adoption is slowed by fear of regulatory uncertainty and the complexity of building and using Web 3.0 platforms.

With all the adoption of the last decade, The next phase of the African Web3 story is going to focus on the education of African institutions to co-adopt and build Web3. This education story will unlock mass adoption and push regulated financial companies to offer Blockchain services to their users.

Click to see the full report:

https://www.emurgo.africa/emurgo-africa-report-2023

• Why 2022 set records for crypto hacking

• How sanctions affect the crypto crime ecosystem

• New tricks cybercriminals using for crypto money laundering

• Illicit crypto volumes reached an all-time high in 2022

• Centralized exchanges only received 0.3% of illicit funds decrease from the 5% of illicit funds that centralized exchanges received in 2020.

Let’s Dig

According to the report; Illicit transaction volumes hit an all-time high of $20.6 billion and It was observed that 43% of illicit volumes came from sanctioned entities, most from Garantex, a Russian crypto exchange.

Transaction volumes are not included in the measures of illicit activities. FTX and the other entities that went bust were not identified as criminal entities in the report.

• The share of illicit activity rose from 0.12% in 2021 to 0.24% in 2022, the report cited that crypto-related scams and revenues are down drastically, but ransomware is on the rise.

• According to the report, sanctions played a huge role in reducing crime activities, which were placed on platforms that aided illicit activities.

Let’s talk Sanctions!

• While it may seem like crypto is invisible, the report showed that centralized exchanges, fiat on/off ramp systems, and blockchain tracking tools make it possible to track bad actors.

• Agencies like the Office of Foreign Assets Control (OFAC) of the U.S. Department of the Treasury can now implement sanctions on entities effectively.

Sanctions Highlights!

• Hydra, the largest darknet market, with over 68.2% of illicit funds consisting of fraud shops, ransomware, and cybercrime funds, was shut down in 2022.

• Garantex, an exchange that received over $100 million in illicit transactions, was also sanctioned.

• OFAC also sanctioned a number of other cryptocurrency exchanges, including SUEX and CHATEX.

• In 2022, Tornado Cash, a DeFi protocol many thought was invisible was sanctioned as a result of money laundering by a North Korean hacking group.

Sanctions and Ransomware

As reported by Chainalysis, 2022 was an impactful year in the fight against ransomware. Ransomware attackers extorted at least $456.8 million from victims in 2022, down from $765.6 million. The drop shows the reduced willingness of victims to pay ransoms and improved cybersecurity measures as the victim payment rate dropped from 76% in 2019 to 41%.

Money Laundering

Funds being sent by illicit addresses increased by over 68% in the year 2022, these funds were moved through centralized exchanges and mixers to make it harder to trace funds’ origin (e.g., Tornado cash), DeFi protocols, and off-ramp tools.

As crypto platforms increased monitoring and compliance tools in 2022, the report stated that Individuals who engage in money laundering and other illicit activities**,** now use private messaging apps and Tor browsers. However, compared to the traditional financial investigation, there still a good chance for compliance and sanction enforcement, an advantage that the blockchain provides with its transparency.

Stolen Funds

2022 was a big year ever for crypto hacking. North Korean-linked hackers broke their previous record, pushing the total amount stolen to $3.8 billion. Most of these funds were moved using Tornado Cash. When it was sanctioned, activities moved to Sinbad, another mixer.

Let’s explain what a Mixer is: Mixers makes it impossible to trace crypto transactions by returning pre-mixed assets that break the link between the input and output assets.

Oracle (Price) Manipulation Hack

In 2022, the Mango Markets protocol was hacked for $117 million. Avraham Eisenberg, the attacker used a flash loan to manipulate the price of SOL on a number of different exchanges. This allowed the attacker to buy Solana at a lower price and then sell it at a higher price, making a profit.

Oracle manipulation attacks were a major threat to DeFi protocols in 2022. These attacks involve hackers artificially inflating the price of a token by manipulating the price oracles that DeFi protocols use to get their pricing data. Once the price of the token has been inflated, the hackers can then take advantage of this inflated price to make a profit.

Crypto Scams

According to the report crypto scam revenue fell by 46% in 2022, due to the bear market. The scam revenue correlates closely with the price of Bitcoin, the bear market is spurring the rise in usage of stablecoins by scammers. According to the report, crypto scam is often underreported by victims because it’s closely related to pig butchering and also pump/dump scams.

Let’s explain

• Pig butchering scams involve bad actors promoting worthless tokens, often called a "shitcoin." They often use celebrity endorsements, influencers, or fake news articles to make the token seem legitimate. Once they have attracted investors, they will sell off their own tokens and disappear, leaving the investors with worthless coins.

• Pump-and-dump token scams are similar to pig butchering scams, but they involve a coordinated effort to artificially inflate the price of a token. The scammers will buy up a large amount of the token and then promote it to unsuspecting investors. Once the price of the token has risen, the scammers will sell their tokens and take their profits, leaving the investors holding the bag.

Key Takeaway

Contrary to what some may believe, however, the report makes it clear that law enforcement agencies can investigate and sanction the activities of bad actors, scammers, and criminal enterprises in crypto, with the right tools. Crypto scams pose a serious threat to the crypto ecosystem. Recently, our analyst team has been investigating a pattern of crypto scams happening in Nigeria since the bear market, and our next report will focus on this.

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Explore the full 2023-crypto-crime report from Chainalysis.

The narrative around crypto education in Africa can be summed up in one statement: "Go ye into Nairobi and make them disciples of Vitalik, Satoshi, and degens." While this strategy sounds energetic, the idea of making every young African a Crypto or Bitcoin maxi is a bull market-only strategy and not sustainable if we are serious about onboarding 500 million Africans to Web3.

“Don't think it's necessary to make every young African a crypto apostle/Bitcoin Maxi” @Isaac

In this episode of The Frontiers!

We explored the endgame of crypto education, value, and product-based approach to educating stakeholders, regulators, and users plus what applies. Our co-host Dennis shared his view on why crypto education is not a critical part of the Web3 adoption strategy in Africa and the role product designers can play in the story of Africa’s crypto adoption.

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The current buzz surrounding Africa's Web3 movement is often summarized in one enticing phrase: 'Africa is the next big thing.' While this statement appears optimistic, it overlooks the intricate realities of the continent's digital landscape and inadvertently undermines the tireless efforts of the communities and individuals shaping Africa's Web3 future.

In our very first episode

We embarked on a compelling journey to uncover the untold story behind this oversimplified narrative. We delved deep into how this perspective has fallen short in recognizing the diversity and complexity of Africa's digital realm, consequently painting a skewed picture of Web3's true potential on the continent.

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Whether money in Africa is centralized or decentralized, the endgame of blockchain, crypto, Web3, DeFi, or whatever we choose to call it, is to have competitive money built on open finance protocols that provide Africans with access to wealth-building opportunities and economic transparency.

With this established

Web3 is all about making money competitive and programmable.

To achieve this goal, we need to understand how it applies and enables institutions, businesses, and builders to create compliant solutions.

The Frontiers; so it begins

A bi-monthly podcast, where we delve into the fascinating world of Web3 and explore the big-picture stories that are reshaping the future of money and finance in Africa.

Join us as we uncover the real-life experiences, untold tales, and innovative trends driving the financial revolution on the continent. Get ready for insightful conversations, captivating narratives, and a fresh perspective on the boundless possibilities that await in the world of Web3.

Together, we'll navigate this exciting journey

Through engaging conversations, we'll uncover how these innovations touch the lives of everyday Africans, driving meaningful improvements and propelling the continent toward a brighter future.

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