Update on Aug 22, 2022

Earlier this month, the Enforcement Directorate of India searched the premises of Sameer Mhatre, one of the directors of Zanmai Labs, the parent company of crypto exchange WazirX. Following the search, ED ordered to freeze INR 64.7 crores (~$8 Million) on WazirX’s bank accounts.

WazirX has filed a writ petition to stay this order in Karnataka High Court. The hearing is scheduled for Aug 24, 2022.

It also came to light that WazirX had filed a petition in Delhi High Court earlier this year. In January 2022, WazirX filed a writ petition in the court seeking to set aside the ED proceedings with regards to the show cause notices served to its parent company, Zanmai Labs. The Delhi High Court has asked the Enforcement Directorate (ED) to file its reply by Sep 5, 2022.

Original Letter

Type WazirX on google and you will see versions of this one headline across platforms, “Crypto Exchange WazirX Being Probed For Alleged ₹ 2,790 Crore FEMA violation”. Below is a tweet from Enforcement Directorate from June 2021, more than a year old.

ED @dir_ed

ED has issued Show Cause Notice to WazirX Crypto-currency Exchange for contravention of FEMA, 1999 for transactions involving crypto-currencies worth Rs. 2790.74 Crore.

7:44 AM ∙ Jun 11, 2021

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2,701Likes808Retweets

See similarities? Of course.

So why, after one whole year, has this become a headline again? The answer isn’t simple. It involves a bit of politics and a lack of priorities in Journalism. Additionally most of the mainstream media has run the news as a money laundering probe, but it isn’t. It is an assumption made my media based on certain information shared in the Rajyasabha.

Tl:dr - ED alleges that WazirX aided FEMA Violation of 2790 crore INR as they do not keep a record of Binance <> WazirX transfers. WazirX claims they do. But the story is one year old. Why is it popping up in your inbox today? Grab some popcorn as we dig into its history.

Let us understand the probe on WazirX, laws applicable and the WazirX-Binance partnerships in detail today.

The History of WazirX and Binance

At its peak, WazirX was the largest cryptocurrency exchange in India by volume. It not only facilitated thousands of transactions a day for traders, it even facilitated transactions for other exchanges. Yeah, some of the other top exchanges in India were using WazirX to convert their INR to USDT and vice versa.

Binance acquired WazirX

The Indian exchanges like WazirX and Bitbns on the other hand had created innovative P2P marketplaces for traders to buy and sell USDT with INR. On paper, it made sense, to let people buy USDT from WazirX and then convert it to other cryptos on Binance.

Fast forward to 2020, the WazirX market began thriving as the supreme court removed the restrictions on banks from supporting crypto businesses

Meanwhile, in a bid for both exchanges to leverage the large userbase, they introduced a product to transfer crypto assets for free between the two exchanges. Any user with an account in Binance and WazirX can connect those accounts and transfer multiple crypto assets for free in real-time. If you didn’t have an account on either exchange, you can create one.

Fast forward to today, the feature is still live but now there exists a fee for such transactions.

Pay attention, because it is this feature that leads to the aforementioned investigation by Enforcement Directorate. Although most governments loath the public ledgers of blockchains, seemingly it became an inconvenience when WazirX and Binance did the transfers off-chain.

On August 2, 2022, the minister of state for Finance Pankaj Chaudhary wrote in reply to a question in Rajya Sabha,

The investigation has revealed that the Indian cryptocurrency exchange Wazirx, operated by Zanmai Labs Private Limited in India, was using the walled infrastructure of Cayman Island-based exchange BINANCE.

ED, it is believed, wasn’t happy that the transactions weren’t tracked. But is that true? Did WazirX really not keep a note of transactions? Were not all WazirX users KYC’ed?

Crypto, Money Laundering and FEMA

When ED tweeted it was probing WazirX, it sent tremors in the industry. Nischal Shetty, the co-founder and CEO of WazirX tweeted, that they were yet to receive any official show cause notice and that they were able to trace every single trade with users who are fully KYC’ed.

Nischal (Shardeum) ⚡️ @NischalShetty

3/3 We are able to trace all users on our platform with official identity information. Should we receive a formal communication or notice from the ED, we'll fully cooperate in the investigation.

9:26 AM ∙ Jun 11, 2021

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2,462Likes276Retweets

It wasn’t a secret though that ED was probing WazirX. Some of our readers had received notices from ED already. One of our community members had a trading volume of 300 crore INR ($38 Million). They were of course using arbitrage opportunities across WazirX and Binance.

Why was this amount constituted to being laundered? They were simple trades. Even if funds were sent from WazirX to Binance, it was to user’s own account. Why was WazirX being probed for that or are being alleged to have laundered money?

Let us understand the law here. FEMA or Foreign Exchange Management Act is the law that protects the movement of money from India to outside. India puts a lot of capital control laws to protect the capital from flowing away, and FEMA is one of them.

Under FEMA, an individual can only send a maximum of $250000 outside of India in a year for certain specified purposes. Spoiler Alert - Crypto investment is not one of them. So, technically, if you sent more than $250000 out, even in crypto, you’re in violation of FEMA. Hence, when you transfer funds to an exchange that is not India domiciled, you’re possibly in violation of FEMA.

The counter-argument to this is simple, if I transfer funds to my Binance account, that account still belongs to me, only I have control of it, and I live in India, so it’s just a piece of information sitting on a server outside of India, but the funds are mine and I am in India, so there should be no violation. Right? Sounds about right.

But then, you’re in violation if you send more than $250000 to someone other than your own wallet. And that is precisely what WazirX is being accused of.

WazirX Allegedly kept no records of Binance transfers

Chaturvedi, in his reply in the parliament, added

This is where, I, as a crypto-journalist, investor and enthusiast have a problem. I am a WazirX user. Many of you are too. If you were to open Binance or WazirX and find out how many transfers you made between WazirX and Binance, would you be able to?

The answer is yes. And if that data is available to you, as a user, then why won’t it be available to the investigators? The answer is, once again, yes. I am sure WazirX has made many mistakes along the way, but not keeping data of transfers is too stupid of a mistake to make.

Besides, the news is one year old. Nischal Shetty is building Shardeum and Siddharth Menon (second co-founder) is building Tegro while WazirX is also running smoothly under them.

So the news today is not sensational breaking news. Neither is it something that should worry WazirX users. WazirX and many other crypto platforms in India get probed occasionally by authorities.

This leads us to two very important points of this 10 min read.

• Is the investigation still ongoing by ED? If yes, are there literally no updates in over one year?

• Why are journalists not doing enough due diligence to dig up that this case is over a year old?

I don’t know the answer to the first one, but for the second one, it is once again, elementary. They need your clicks as fast as they can. No media channel can afford to delay such a juicy story. And that is exactly what happened. The same information was regurgitated by mainstream media, then the aggregators like WatcherGuru and slowly it will infiltrate your minds from wherever you choose to look.

I have been blocked by many of these for calling them out. It is one of the reasons I started the newsletter. This is the only way I can share the truth with you without any influence.

If you liked this coverage, please do give a like, comment and share this article, it would mean a lot to me. Also, subscribe to the newsletter so I can meet you every day in your inbox.

Update Note:

1. The title was updated, removed the word “Laundering” as the official Rajyasabha response does not say Money Laundering.

2. Changed certain sentences to focus on FEMA violation and not money laundering for reason 1.

Solana Wallets were Drained of Millions worth SOL and USDC. The only way to protect your funds is…

In Other World

Here are some of the happenings from the rest of the crypto universe:

1. Michael Saylor will step down as MicroStrategy CEO but remain as executive chair. Read more on CoinTelegraph.

2. Over $9 Million has been returned by Ethical Hackers to Nomad. The Bridge suffered an exploit that led to a theft of $190 Million. Read more here.

3. The architect of Aadhaar and UPI, iSPIRT is looking to build RBI’s proposed digital currency. Read more on TMC.

Industry Insights and Research:

1. Web 3.0 market to reach USD 81.5 Billion in 2030. Read the Full Report here.

2. Looking past the hype and critique, Web3 and the metaverse are shaping a new application layer for the internet. Read the Deloitte Report here.