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All About the ‘Episode of WazirX’

20 Aug 2022 By : Somesh Gaur
Southeast Asia’s Lar

The crypto market is attempting to emerge from a severe recession, but scams, hacks, and other tragedies are holding it back. A new kind of dispute has erupted on top of the price declines, layoffs, and bankruptcies that have been sweeping the market for the past three months. 

Also, read-Three Arrows Capital (3AC) collapse: From Billions to zero

WazirX, a renowned cryptocurrency trading platform based in India, has come under scrutiny in the last few weeks. The Enforcement Directorate revealed this week that it conducted searches on one of the directors of Zanmai Labs, which owns WazirX, and issued an order to freeze bank balances totaling Rs 64.67 crore.

WazirX is not just any crypto exchange in India; it is the largest exchange and one of the best things to happen in the Indian crypto ecosystem. That’s a huge blow since India is one of the countries most aggressively leading the push into crypto. It has the fastest rate of crypto adoption in the world in terms of first-time investors. The country sees billions of dollars in transactions per day.

However, the exchange has suffered a setback as a result of the investigation. Over the past week, the trading volume for the coin has decreased by half, and its price has fallen by more than 8%. Let's take a closer look at these issues and investigations.

What is the investigation into WazirX?

The investigation is part of the ED's ongoing investigation into money laundering allegations against several non-banking finance companies and their fintech partners, all of whom have been charged for using loan applications for unethical lending tactics. The companies employ telemarketers who misuse personal information and extort high-interest rates from borrowers. 

While conducting the fund trail investigation, ED discovered that large amounts of funds were diverted by fintech companies to purchase crypto assets and then launder them abroad while conducting the fund trail investigation. At the moment, these companies and virtual assets are untraceable. The crypto exchanges have been summoned. According to ED, the maximum amount of funds was diverted to the WazirX exchange, and the crypto-assets purchased were diverted to unknown foreign wallets. 

The agency is looking into at least ten cryptocurrency exchanges for allegedly using the profits of crime from the companies charged in the instant lending app case to launder more than Rs 1,000 crore. The accused app-based loan firms reportedly used fintech to receive money. 

The accumulating profits were subsequently transferred using cryptocurrency out of the nation. The main issue is that once money is transferred to a wallet abroad, it can no longer be tracked. The ED stated, "To avoid regulation by Indian regulatory agencies, they are providing conflicting and unclear responses."

On August 5, the Directorate of Enforcement (ED) examined one of the directors of M/s Zanmai Lab Pvt Ltd, which owns WazirX, and froze its bank accounts, preventing Rs 64.67 crore.

The investigation's backstory

WazirX ran into difficulties last year when the ED stated that it had given the exchange a show-cause notice for "violating FEMA, for transactions involving cryptocurrencies worth Rs 2790.74 crore."

WazirX received a warning for permitting the transfer of cryptocurrency to unidentified wallets. All of the cryptocurrency transactions between WazirX and Binance were not being tracked on blockchains, according to Pankaj Chaudhary, the state minister of finance. On June 11, 2021, ED stated in a press conference that the Rs. 800-crore cryptocurrency influx and Rs. 1400-crore cryptocurrency outflow was not recorded on the blockchain. 

Following this claim of currency fraud in June 2021, Mumbai authorities started looking into tax evasion in January 2022, and WazirX was suspected of only paying GST on commissions it received on transactions in Indian rupees, not the fees it charged on exchanges in WRX tokens. Nischal Shetty and Siddharth Menon, two of WazirX's co-founders, were said to have stepped away from day-to-day operations a month later, in February 2022, to concentrate on their new initiatives. By April, the two had moved to Dubai.

The ED claims that once they started investigating finance companies for fraud, those businesses began using their revenues to purchase cryptocurrency, with WazirX accounting for the great majority of those purchases. They then transferred the money into foreign wallets via WazirX. Despite being given numerous chances, WazirX failed to disclose the KYC of the wallets and provide information regarding the cryptocurrency transactions of the questionable fintech software companies.

Before July 2020, WazirX stated that they did not even record the information of the bank account from which funds were streaming into the exchange to acquire crypto assets.

Because the director of the WazirX exchange refused to cooperate, the ED initiated a search operation under PMLA (Prevention of Money Laundering Act, 2002) on August 3.

ED said: “It was discovered that Sameer Mhatre, the director of WazirX, has complete remote access to the WazirX database, but he is not giving information about transactions linked to crypto assets acquired with the proceeds of the Instant Loan APP scam." WazirX is unable to account for the stolen crypto assets due to inadequate KYC standards; tax regulatory oversight of transactions between WazirX and Binance; non-recording of transactions on blockchains to reduce expenses; and non-recording of the KYC of the opposing wallets. It has not attempted to track down these digital assets.

This is a major issue because neither WazirX nor the Indian authorities can determine which person is connected to the foreign wallet. WazirX, like other exchanges, might do KYC on traders and investors who have wallets and accounts there. WazirX would also be aware of the "address" of the external wallet where any of these traders would send any Bitcoins if they withdrew a small amount. However, it will never be able to determine who is behind the other wallet that holds the Bitcoin. Knowing the address of the wallet does not mean that you know who is hiding it. 

According to the government agency, “by fostering obscurity and having inadequate AML rules, it has actively supported roughly 16 accused fintech businesses in laundering the proceeds of crime through the crypto channel." As a result, comparable moveable assets worth Rs. 64.67 crores held by WazirX were frozen under the Prevention of Money Laundering Act, 2002.

Conclusion

ED has stated that a few summons were sent to all Indian crypto exchanges, but it asserts that WazirX was responsible for the majority of the funds that were moved and that the company actively helped 16 lending app companies launder money by using the crypto way. If this information proves to be accurate, the asset freeze may include any cryptocurrency assets held by WazirX, which could scare Indian cryptocurrency investors who used the platform to make their investments. 

Although it is anticipated that WazirX users will undoubtedly suffer from some customer base loss, which will have an impact on the business. However, at this point, all of these are only presumptions, and only time will tell if they result in formal litigation or a settlement.

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