WazirX-Binance row: Ownership spat, ED probe raise questions on structural viability of WazirX

Amid the already beaten portfolio of crypto users due to a sharp decline in crypto value and strict tax regime, the Indian crypto users are in a knot due to recent row between Binance, the world's largest cryptocurrency exchange by trading volume, and Indian crypto exchange WazirX. The situation has worsened with Binance removing the off-chain crypto transfer to WazirX, which was a sought-after feature amongst the users as it was used for transferring value outside of the blockchain without any gas fees. Moreover, Enforcement Directorate (ED) has commenced its investigation against the directors of Zanmai Lab Private Limited, which owns WazirX.

“The 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 the ownership spat with Binance has raised questions on the structural viability of WazirX," explained Ashutosh K. Srivastava, Senior Associate, SKV Law Offices.

“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. In fact, the nature of allegations levelled by ED may lead to suspension of WazirX and the users will be left in a soup. Therefore, until and unless the issues concerning WazirX are not resolved, users may exercise prudence and diligence with the funds invested in WazirX and may avoid any further investment unless some clarity comes,” said Srivastava.

What can Binance and WazirX row mean for investors and employees of WazirX?

“ED has mentioned that the summons was issued to all Indian crypto exchanges, 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,” pointed out 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 then impact the company. However, all of these are merely speculations right now and only time will tell if it will blow into a full-fledged dispute or settlement,” said Sameer Jain, Managing Partner, PSL Advocates & Solicitors.

As per experts, 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 if it were to face insolvency proceedings.

“While the battle of words rages on between both companies, only time will tell what’s in store for India’s top-ranked crypto exchange in the foreseeable future. Binance has removed the functionality for users to transfer their funds from WazirX to the Binance app,” Seth added.

Seth explains Binance earlier 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 the whole range of cryptocurrencies directly through Binance’s trading platforms.

She further explains that WazirX is currently under the Enforcement Directorate (ED) radar, for allegedly assisting instant loan app companies in laundering money. In fact, the agency has frozen the financial assets of the Indian crypto exchange after a search operation, under the Prevention of Money Laundering Act (PMLA).

By way 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 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.

Elucidating on how Zanmai Labs is an Indian entity owned by Shetty and the other co-founders, he clarified that Zanmai Labs only has a licence from Binance to operate INR-crypto pairs, while Binance manages crypto-to-crypto pairs and processes withdrawals. Binance, on the other hand, has clarified that the 2019 'acquisition’ was limited to an agreement to purchase certain assets and intellectual property of WazirX, with WazirX continuing to be operated and managed by Zanmai Labs.

The ED, however, says that it froze assets worth 646.70 million rupees ($8.16 million). As a result, the ED can freeze all the assets of WazirX and impose a blanket restriction on all forms of trading and transactions on the WazirX and Zanmai platform

What can be the legal recourse measure?

“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,”  Seth said.

“It's difficult to prescribe any recourse to WazirX, as it would completely depend on the terms of the agreement executed between the parties. There is no point speculating a possible course of action when the course would already have been chartered in the contract,” clarified Jain of PSL Advocates & Solicitors.