NEW DELHI: India’s largest cryptocurrency platform has been in the news all of this week after the Enforcement Directorete revealed that it conducted searches on one of the directors of
Zanmai
Labs, which owns WazirX, and issued an order to freeze bank balances totalling Rs 64.67 crore.
WazirX
is being investigated for money laundering.
What is this probe about?
The investigation is part of ED digging into money laundering allegations against several non-banking finance companies and their
fintech
partners that have also been charged with predatory lending practices through loan apps.
The companies use tele-callers who misuse personal data and extort high interest rates from borrowers. The fintech companies backed by Chinese funds could not get
NBFC
licenses from RBI to lend money and instead signed memorandum of understanding ( MOUs) with defunct NBFCs to use their license.
After the criminal investigation began, many of these fintech apps shut shop and diverted profits using the above modus operandi. While doing the fund trail investigation, ED found that large amount of funds were diverted by the fintech companies to purchase Crypto assets and then launder them abroad. These companies and the virtual assets are untraceable at the moment. Summons were issued to the crypto-exchanges. It is seen that maximum amount of funds were diverted to WazirX exchange and the crypto-assets so purchased have been diverted to unknown foreign wallets, said ED in a press statement.
The Modus Operandi
The agency is probing at least ten cryptocurrency exchanges for allegedly laundering more than Rs 1,000 crore as proceeds of crime from the firms accused in the instant loan-app case. According to the Economic Times, the ED probe has unearthed instances of the accused firms approaching the exchanges to buy crypto coins for more than Rs 100 crore and sending the coins to international wallets. The accused app-based loan companies allegedly used fintech for receiving payments. The profits accumulated and the balance were then routed out of the country using crypto. The big problem: Once money moves to an overseas wallet, it becomes untraceable.
The ED claims that WazirX is either unable or unwilling to share information on these transactions.
How did events unfold: On August 5, Directorate of Enforcement (ED) conducted searches on one of the directors of M/s
Zanmai Lab
Pvt Ltd, which owns WazirX, and froze its bank accounts, blocking Rs 64.67 crore.
Later, on August 6 in a series of tweets,
Binance
CEO Changpeng Zhao said that the Binance-Wazir-X transaction hadn’t gone through and they didn’t own Wazir-X. Now, Binance had announced in a blog post on November 21, 2019, that it had acquired WazirX. The post announced WazirX’s acquisition by Binance and detailed how platform users would be able to buy cryptocurrencies using Indian rupees (INR), invest in stable coins like Tether (USDT) and access an entire range of cryptocurrencies directly through Binance’s trading platforms.
But in a series of tweets Binance CEO Changpeng Zhao clarified that Binance doesn’t own any equity in Zanmai Labs and only provides wallet services to WazirX as a technology solution. WazirX CEO Nischal Shetty then clarified that Zanmai Labs is a separate entity, while Binance owns the WazirX domain name, has root access to AWS servers, and retains all profits and crypto assets stored on the platform. Shetty also said that Zanmai Labs has a license from Binance to operate rupee-crypto pairs, and that Binance operates crypto to crypto pairs, and processes crypto withdrawal for the company.
Soon after, Binance removed the functionality for users to transfer their funds from WazirX to the Binance app.
How the spat unravelled
The ED, in its statement, said Zanmai Labs Pvt Ltd - the company owning WazirX
Crypto Exchange
- has created a web of agreements with -- Crowdfire Inc. USA, Binance (Cayman Islands), Zettai Pte Ltd Singapore -- to obscure the ownership of the crypto exchange. "Earlier, their Managing Director Nischal Shetty had claimed that WazirX is an Indian Exchange which controls all the crypto-crypto & inr-crypto transactions and only has an IP & preferential agreement with Binance. But now, Zanmai claims that they are involved in only inr-crypto transactions, and all the other transactions are done by Binance on WazirX. They are giving contradictory & ambiguous answers to evade oversight by Indian regulatory agencies," said the ED.
Trouble began in June 2021
In fact, trouble began brewing for WazirX in June 2021, when the ED tweeted that it issued a show-cause notice to the exchange for “contravention of FEMA, 1999 for transactions involving cryptocurrencies worth Rs 2790.74 crore.”
The notice was issued to WazirX for allowing outward remittance of crypto assets to unknown wallets. According to minister of state for finance Pankaj Chaudhary, all crypto transactions between WazirX and Binance were not being recorded on blockchains. ED, in a June 11 press release had said the Rs 800-crore crypto inflow and Rs 1400-crore crypto outflow were not available on the blockchain.This is a big problem because there is no way for either WazirX or the Indian government to find out which individual is associated with the overseas wallet.
"“WazirX, like other exchanges, may be doing the KYC of traders and investors who have accounts and wallets with it. If any of these traders withdraws a few Bitcoins, WazirX would also know the ‘address’ of the external wallet where the Bitcoins are sent. But it can never know the identity of the person or the entity owning the other wallet which receives the Bitcoin. Knowing the address of the wallet is not the same as knowing the people behind the wallet. This is the very nature of cryptos," an industry person was quoted as saying by Economic Times.
Following this forex violation charge in June 2021, in January 2022, Mumbai authorities began probing into tax evasion— and accused WazirX of only paying GST on commissions it earned on Indian rupee transactions and not the fees it charged on trades in WRX tokens. A month later in February 2022, news emerged that two of WazirX co-founders, Nischal Shetty and Siddharth Menon, have stepped away from day-to-day operations and are now focusing on their new projects, and by April the two had relocated to Dubai.
But why did ED freeze bank accounts now?
According to the ED, once they began probing fitench companies for fraud, these firms started diverting their profits by buying crypto—the vast majority of which were bought on WazirX. Then they channelled that money through WazirX into overseas wallets.
"“Despite giving multiple opportunities, WazirX failed to give details of the crypto transactions of the suspect fintech app companies and reveal the KYC of the wallets. Most of the transactions are not recorded on the blockchain either. WazirX informed us that prior to July 2020, they did not even record the bank account details from which funds were coming into the exchange to purchase crypto assets. No physical address verification is done.”
ED further alleged that the lax KYC norms, loose regulatory control of transactions between WazirX & Binance, non-recording of transactions on Blockchains to save costs and non recording of the KYC of the opposite wallets has ensured that WazirX is not able to give any account for the missing crypto assets. It also said WazirX has made no efforts to trace these crypto assets.
"By encouraging obscurity and having lax AML norms, it has actively assisted around 16 accused fintech companies in laundering the proceeds of crime using the crypto route. Therefore, equivalent movable assets to the extent of Rs. 64.67 Crore lying with WazirX were frozen under PMLA, 2002," said ED.
What does this public spat mean for investors who trade on WazirX?
The public spat between the two companies has left WazirX’s 15 million users in the lurch. "“Amidst the already hammered portfolio of crypto users due to sharp decline in crypto prices and stringent tax regime, the Indian crypto users are in a knot in light of the recent spat between Crypto Giant Binance and Indian crypto exchange WazirX. Crypto users have been left in panic and are withdrawing their funds from WazirX. Even though, WazirX has assured that the user’s ability to trade and withdraw will not be hampered, the ED investigation coupled with ownership spat with Binance has raised questions on the structural viability of WazirX. Considering the above state of affairs and the volatility of the crypto market, it would not be out of place for crypto users to switch their account to Binance," said -Ashutosh K. Srivastava, Senior Associate, SKV Law Offices.
"ED has mentioned that the summons were issued to all Indian crypto exchanges, but it claims that most of the laundered funds were diverted via WazirX and that the company has actively assisted 16 loan app companies in laundering money using the crypto route. If this turns out to be true, the asset freeze could extend to all crypto assets held by WazirX and could be a cause of worry for Indian crypto investors who have invested via the platform. To make matters worse, investors would lose all rights to their funds if WazirX joins an ever-growing list of crypto firms filing for bankruptcy or facing insolvency proceedings," said Kritika Seth, Founding Partner,
Victoriam Legalis
– Advocates & Solicitors.
"Though, I do not expect all WazirX users to migrate for want of a parallel efficient platform, there will certainly be some loss of consumer base, which would them impact the company. However, all of these are merely speculations right now and only time will tell if it will blow in to a full fledged dispute or settlement," said Sameer Jain, Managing Partner, PSL Advocates & Solicitors.
What is the legal recourse for WazirX?
"The crypto-to-crypto trading and crypto deposits and withdrawals are directly owned by Binance and ED can get this information in the terms and conditions of the website. WazirX has a legal document of acquisition and a licence to operate the rupee market in India. WazirX can reproduce appropriate legal documents including KYC documents and details of the transactions to deny claims of illegal transactions," said Kritika Seth, Founding Partner, Victoriam Legalis – Advocates & Solicitors.
