Home / Opinion / Columns /  ED actions have had a chilling effect on India’s crypto winter

If success has many fathers, then a crypto exchange in the eye of an Indian money-laundering storm has become an orphan. After Indian law enforcement froze $8 million in WazirX assets, Binance CEO Changpeng Zhao denied owning India’s largest crypto exchange. Binance’s November 2019 blog post, which had announced the takeover, now comes with a postscript: “The ‘acquisition’ described in this blog was limited to an agreement to purchase certain assets and intellectual property of WazirX. Binance did not purchase any equity (and does not own any equity) in Zanmai Labs, the entity operating WazirX and established by the original founders."

One founder disputes this version of the deal, though. Nischal Shetty, now based in Dubai according to media reports, contends that Binance controls WazirX—it owns the domain name and could shut down the platform. The only thing that’s not under the world’s largest crypto exchange is Zanmai, Shetty argues. “Naturally, if Binance desires control of Zanmai, they can acquire shares," he tweeted. So why doesn’t it, if as Shetty claims, it was interested in doing so as recently as in February?

CZ, as the Binance CEO is popularly known, wouldn’t like to walk into the lair of India’s dreaded Enforcement Directorate to stake a claim on Zanmai. Certainly not after the ED’s 5 August press release that alleges Zanmai owns WazirX—and that the crypto exchange was used to launder money by predatory Chinese loan apps. Zanmai said it co-operates the platform with Binance and is in the position of any other intermediary “whose platform may have been misused."

The dodgy apps rented the balance sheets of Indian non-bank lenders and vanished with their illegal profits. “The maximum amount of funds were diverted to WazirX exchange and the crypto assets so purchased have been diverted to unknown foreign wallets," the ED said, adding that Zanmai officials “are giving contradictory and ambiguous answers to evade oversight by Indian regulatory agencies."

What oversight? The Reserve Bank of India has a big problem with crypto. In 2018, RBI instructed banks not to entertain customers who dealt in virtual currencies. Exchanges like WazirX, then a fledgling startup, survived the draconian diktat by restricting themselves to facilitating person-to-person transfers. In 2020, the industry heaved a sigh of relief when the Supreme Court held RBI’s ban to be unconstitutional. However, all that has happened since then is that authorities have started taxing crypto trading without bothering to regulate it.

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The ‘crypto winter’ brought on by the collapse of TerraUSD stablecoin may have convinced RBI that its dismissive stance was the right one. RBI Governor Shaktikanta Das termed cryptocurrencies a “clear danger" last month in Singapore. His host nation also took a few knocks in this year’s turmoil, most recently with the payment freeze at crypto lender Hodlnaut, which had an in-principle nod to obtain a licence. The approval has been rescinded, but some spillover into the local financial system means that Singapore’s monetary authority doesn’t see crypto as a systemic risk. It’s not something the city-state is going to outlaw.

India could also have said that if people are going to play with hazardous tokens, let’s make sure they don’t hurt themselves or others. By showing scant interest in regulating digital assets, RBI has left the industry in a bad place. Thanks to a recent Supreme Court ruling, the ED has nearly unlimited powers for carrying out arrests and raids, attaching property and recording self-incriminating statements. Bail is near impossible and the burden of proving innocence is on the accused. A couple more scandals, and the ED may achieve the shutdown that RBI has long wished for. The crypto talent India has may flee to places like Dubai.

If a comparison with a global financial centre like Singapore is not very helpful, maybe India should look to Thailand for inspiration. There, digital regulations are being tweaked to actively create a role for the central bank in safeguarding investors at licensed entities like Zipmex, a crypto exchange that briefly suspended coin withdrawals. What RBI wants is a blanket ban on crypto because “it is not possible to regulate something that one cannot define."

Lame excuses have led to a bizarre situation where nobody comes forth to claim parentage of India’s largest crypto bourse. That’s what you get by letting jail risk do the job of adult supervision. The ED in its press release took WazirX to task for its alleged lack of due diligence: “No physical address verification is done," it said. “There is no check on the source of funds of their clients." If this picture of a lawless sphere is true, then a big part of the blame goes to RBI’s lack of regulatory interest. Letting the ED add its own chilling effect to India’s crypto winter risks making this industry shrivel and die. 

Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services in Asia.

Elsewhere in Mint

Long Story reveals how expensive and rare orchids are smuggled out of India. In Opinion, Nitin Pai draws nation-building lessons from a Bollywood song. Bibek Debroy writes on India's Amrit Kaal modernity. ED has made India's crypto winter colder, argues Andy Mukherjee.

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