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The Enforcement Directorate (ED) on Friday said it has issued a notice to cryptocurrency exchange WazirX for violating the Foreign Exchange Management Act (Fema), 1999, for transactions worth 2,790.74 crore. Mint explains what this means for investors.

What is the ED show-cause notice about?

ED suspects that operators of fraudulent Chinese investment apps used WazirX to transfer 57 crore abroad. The operators allegedly converted rupees to USD-Tether (USD-T), a crypto pegged to the dollar, and transferred it to wallets of Binance, the parent cryptocurrency exchange of WazirX registered in the Cayman Islands. The notice also mentions a transfer of around 1,400 crore from WazirX accounts to Binance accounts, and 880 crore from Binance to WazirX. WazirX has denied receiving any such notice, and said it has complied with all KYC and anti-money laundering rules.

Are Indian investors also in breach?

This is a legal grey zone, since India has not passed any law on cryptocurrency. However, certain types of cryptocurrency transactions have a higher risk of attracting penalties. These include transferring money abroad using cryptocurrency. Investors should avoid transferring money to a cryptocurrency exchange outside India or transact directly with users outside the country. If you cannot ascertain the location of the wallet you are transacting with, avoid such a transaction, until more regulatory clarity emerges. Keep records of all your transactions.

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At stake

Will it affect crypto trading on Indian exchanges?

Indian crypto exchanges were already facing an unofficial banking squeeze, with many exchanges suspending the direct acceptance of rupee deposits from users. Banks were also sending warning emails to customers seen to have crypto-related payments in their accounts. Banks may take a cue from the ED notice and extend the squeeze possibly affecting withdrawals.

Should investors pull out investments?

While the ED notice is a cause for concern, WazirX may be able to convince ED or courts that it has not contravened Fema. The ED action also does not affect investors directly. But liquidity can dry up on the back of this action, making transactions difficult or in the worst case, leaving investors stranded with illiquid assets. Experts have said if a particular exchange sees a loss of liquidity, you can move your cryptocurrency to another exchange, or even a cold wallet (off-exchange holding) and transact in peer-to-peer mode.

What else should you keep in mind?

Investors should maintain records of their transactions and pay tax on their gains. Depending on the frequency of trading, the gains can either be treated as business income (in case of frequent transactions) or capital gains. The gains may have occurred even if they have not been converted into Indian rupees, according to some experts. For example, a trader who converts from bitcoin to ether and back to bitcoin at a profit, may also have to pay tax on this transaction even if he does not convert the bitcoin into the Indian currency.

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