Cryptogram-12AUG2022

WazirX vs. Binance: Who’s the culprit?

August 12, 2022

12 August 2022

In this issue

Hello, It has probably happened before, but surely it doesn’t happen too often. Rarely do we see the “founders”, “investors” or “owners” of a company fighting with each other insisting that they DO NOT own or run a company. Thanks to the very serious money laundering charges by India’s Enforcement Directorate (ED) against cryptocurrency exchange WazirX. Its alleged parent and present owner Binance and the original founders of WazirX are fighting over the operational control of the company, with both insisting that it is the other party which has it.

It isn’t shocking, really. No one wants to be held accountable for the alleged money laundering, which, at this point, seems very likely to have happened. But who’s the main culprit, and are any of the main characters in this alleged criminal enterprise not guilty, legally or ethically? And, what should be the takeaway from this for the Indian crypto ecosystem? On this issue, we try to answer these questions.

Important note: Since Giottus is a competitor of WazirX, this issue is primarily authored by Ramanathan S from TNM Brand Studio. This newsletter is usually put together by Giottus Crypto Platform and The News Minute’s Brand Studio. You can read all the previous issues of Cryptogram here.

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THE BIG STORY

WazirX vs. Binance, and lessons for Indian crypto ecosystem

First, a quick roundup of what has happened.ED has been investigating illegal Chinese loan apps for their predatory lending practices in India (here’s a great story by TNM on these apps). One part of the ED investigation was to trace the money: how was it being laundered out of India? One of the ways, ED says, was through cryptocurrencies.It is alleged that Chinese nationals first bought cryptocurrencies on WazirX in INR (ostensibly proceeds from predatory loan apps), then transferred those tokens to the Binance Wallet via off-chain (thus no record of the transactions on the blockchain) transfers. Off-chain crypto-crypto transactions between the two wallets were only allowed because Binance “acquired” WazirX and had a “preferential agreement.” These crypto assets transferred to the Binance Wallet from the WazirX Wallet are understood to have been taken out towards their final destination. Binance is registered in Cayman Islands. Exact quantification of the amount of cryptocurrency that has travelled offshore is not possible because of the completely anonymous way of record keeping of trades being done by WazirX.

Another problem the ED faces here is that the exact corporate structure as well as the ownership of WazirX is currently unknown. CZ, Binance’s Chinese-Canadian CEO, says Binance doesn’t own any equity in Zanmai Labs, which he calls as the “entity operating WazirX.” He also says that their “acquisition” of WazirX never fully happened. But WazirX founder Nischal Shetty says that while it is true Binance has no equity in Zanmai, Binance now owns WazirX, the brand and the product, and has root access to the server. Shetty says he has the paperwork to prove the transfer of ownership to Binance. CZ has contradicted himself on his position by earlier calling WazirX “Binance-owned.” The narrower and more critical question here is who was in-charge of the crypto-crypto transactions in WazirX. ED says that Shetty had earlier claimed that WazirX controlled all the crypto-crypto and INR-crypto transactions and only has an IP and preferential agreement with Binance, but now says that they are involved in only INR-crypto transactions, and all the other transactions on WazirX are done by Binance. We cannot know the truth unless more paperwork emerges. ED has frozen WazirX assets worth about Rs.65 crore in accordance with the money laundering law. WazirX has since disabled off-chain transfers.Who’s the culprit? If the question is if the management of WazirX and Binance specifically knew about the laundering of money from Chinese loan apps to destinations outside India, the answer is that it is unlikely. It would be fair to give them the benefit of doubt there. But if the question is if they knew that their system can allow for easy and untraceable money laundering, the common-sense answer is a resounding yes. Leaders of crypto companies cannot feign ignorance about the capability of their platforms to allow illegal activities, and they are all smart enough to know what can or cannot be done on the products they have built. It is important to note that these are not the first allegations of money laundering against Binance, they are well aware of how weak their money laundering checks are. And given this, if Shetty and co. claim that they did not know that laundering was being enabled and made untraceable through the off-chain wallet-to-wallet crypto transfers and WazirX’s preferential agreement with Binance, then…

What we should really care about The real culprits are for the cops to find out, but there are other things which matter more to the rest of us, like consumer protection. Amidst the ongoing crypto winter, this has only further beaten down the confidence of Indian crypto investors. The blame-game is helping no one, and the concerns of investors are not being addressed. Scams can happen in any sector or system, so the trust in a system is based on whether punitive action can be taken against scamsters. And that’s what’s missing in the present situation – those at the helm of the alleged crypto scam are either unknown or absconding, and there is often no way for the Indian government to get to them. This unfortunate reality is a good starting point for Indian investors, companies and policymakers to think about how they need to deal with the crypto ecosystem.Policymakers should incentivise crypto companies to stay in India and comply with local laws – this cannot happen if the ecosystem is alienated through harsh laws and taxation. This is the right opportunity for the government to be proactive and have strong but sensible regulations. Instead of thinking how to bypass the law, crypto companies have to work with the government and help them make better legislation.Similarly, the Indian investor needs to choose platforms which work within the Indian regulatory framework and comply with local laws. Companies which have managed to bypass compliance can also bypass any measure put in place to protect the interest of the consumers, which is what is at risk with what is happening with WazirX right now. In a statement released recently, CEO of Giottus Crypto Platform, Vikram Subburaj said, “The key concern of the ED has been that they have not received the data they had requested from the exchange. For the crypto ecosystem to grow in India, we believe it is necessary for the industry to be transparent and to share relevant data to concerned departments at all times. We hope investors are able to withdraw their funds in a timely manner when they wish to.” He points out that Giottus is the only 100% Indian-owned exchange in India which has more than 1 million users.As a consumer, if you want the law to protect you, you have to choose a company which complies with the law, and the government needs to put in place laws which incentivise compliance. This is ironic, given the core idea of a decentralised financial system, but this is the new and acceptable reality which will safeguard the investor and the ecosystem.

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  THE TOP FIVE 

Stories from this week you cannot miss

  EXPLAIN, PLEASE 

Demystifying the world of cryptocurrency

This week, we explain SOULBOUND TOKENS (SBTs)SBTs are like NFTs which can store information and cannot be traded. They are unique tokens which are publicly-verifiable, but they are non-transferrable. They can be used to store unique information like your degree certificate or employment history. The same way you store your original identity of financial documents in hardcopy in a folder, these documents can be stored as SBTs in a wallet. SBTs can be considered your profile or CV for Web 3.0, if you put all the relevant documents together in one SBT.An SBT will be forever attached to a wallet, and cannot be removed.

If you have any questions or feedback for us, write to us at [email protected]. You can check out the previous issues here.

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