Binance distances itself from WazirX as Indian regulators continue to chase crypto

by · August 15, 2022

The Twitter exchange between WazirX co-founder Nischal Shetty and Binance CEO Changpeng “CZ” Zhao over the ownership of the Indian crypto exchange grabbed a lot of headlines in the first week of August.

WazirX was reportedly acquired by Binance in 2019, and since then the Indian crypto exchange has been referred to as “Binance-owned”; however, to everyone’s surprise, CZ took to Twitter to claim that the acquisition process never went through and Binance has no ownership in the Indian crypto exchange.

CZ said Binance only provides wallet services for WazirX as a technical solution and WazirX is responsible for all other aspects of the exchange, including user registration, Know Your Customer (KYC), trading and withdrawal initiation.

Shetty countered CZ’s claim in another tweet thread claim that Binance actually owns the Indian crypto exchange WazirX and that its parent company, Zanmai Labs, only operates crypto-Indian rupee pairs in WazirX on a Binance license. Binance, on the other hand, operates crypto-to-crypto pairs and processes crypto withdrawals, which can be verified by the companies’ terms of service.

The two co-founders went back and forth over the next couple of days, accusing each other of misrepresenting certain facts.

Based on the tweet exchange between the two co-founders, it is clear that it was indeed an acquisition deal to begin with, but Shetty claimed the deal was for the technology transfer and not the entire company, which is why the WazirX technology is owned by Binance, while Zanmai Labs only operates crypto/INR pairs using a Binance license.

When Cointelegraph reached out to Binance to get some clarity on the acquisition deal, the exchange denied Shetty’s earlier claims that the exchange operates crypto-to-crypto trading pairs. A Binance spokesperson told Cointelegraph:

“Binance does not operate crypto-to-crypto trades on the WazirX exchange. The WazirX exchange is wholly owned and operated by Zanmai Labs. Furthermore, while we agreed to purchase certain technical assets and intellectual property of WazirX, this deal complete.”

In another tweet, CZ claimed that Binance had attempted to pursue the acquisition as recently as February, but was denied by WazirX. Shetty again black to the tweet, claiming the deal involved an acquisition of Binance’s parent unit, but at the time of the deal, Binance gave an “ambiguous response that the parent company is undergoing restructuring.”

The Binance spokesperson told Cointelegraph, “The agreement between Binance and Zanmai Labs was for the purchase of certain assets and intellectual property of WazirX, not equity in Zanmai Labs.” They further added: “We had applied for the assets to be transferred to us under the deal, but this did not come and the deal did not (and could not) be completed.”

WazirX, on the other hand, believes the solution to the current problem is either for Binance to buy out India operations using its parent entity instead of a random entity because that could create risk for users, or for Binance to sell back WazirX.

It took three years to reveal the deal never went through

The main reason for the fallout between the two companies appears to be the alleged money laundering investigation by India’s Enforcement Directorate (ED). The aforementioned investigation is from a year ago, and contrary to popular belief, the investigation focuses on a violation of the Foreign Exchange Management Act (FEMA) rather than money laundering.

FEMA is one of many capital control regulations that the Indian government has introduced to prevent capital from leaving the country. According to FEMA, an individual is only allowed to send a maximum of $250,000 for specific purposes per year outside India. Due to the lack of regulations surrounding the crypto market, FEMA laws do not cover cryptocurrency transfers.

As a result, any user sending crypto transfers over $250,000 will still be in violation of FEMA laws. That seems to be the case with the ED’s current investigation into WazirX. In total, 10 other crypto platforms are facing similar investigations by the ED.

Crypto investing is not one of them. But technically, if you send more than the stated amount, even in crypto, that would be a violation of FEMA. Therefore, when you transfer funds to a stock exchange that is not domiciled in India, it is considered a violation of FEMA regulations.

Related: AML and KYC: A Catalyst for Mainstream Crypto Adoption

The year-old investigation made headlines again in 2022, followed by the ED freezing $8.1 million of the exchange’s assets. The ED claimed that it could not find chain records of transactions amounting to millions of dollars. However, WazirX contradicted the ED’s claim and said it has records for every single transaction.

The off-chain transactions referred to by ED are the direct transfer between WazirX and Binance, a feature introduced by the two parties as part of the partnership. The feature allows the transfer of assets between two exchanges without users having to pay any transfer fees.

WazirX claimed in its official statement that there was a big misunderstanding about the off-chain transfers. The crypto exchange said that an ED’s press release tries to consider these transitions as mysterious and unwarranted, when in reality only KYC users of the platform can use the services. Thus, there is no question of unfair means and WazirX said they were confident of proving the ED wrong in the court.

Binance finally shut down the direct bridge between the two platforms on August 11, notifying its users in advance while reminding them that they can still transfer funds to WazirX using standard wallet transfers.

While both Binance and WazirX have assured full cooperation with the investigation, a source familiar with the matter who chose to remain anonymous told Cointelegraph that the investigation spooked Binance, which ultimately led to the fallout. Binance later confirmed to Cointelegraph that the ED investigation forced it to inform its users. A Binance spokesperson described the issues to Cointelegraph:

“We have had issues with Zanmai Labs. We have been trying to work with them to find a solution for some time. The latest news about the ED investigations and notifications at Zanmai is also a significant development. We felt the need to clarify this for the sake of user protection.”

Will Binance–WazirX Saga Affect Indian Crypto Investors?

Binance – The WazirX saga created panic among Indian investors using WazirX. Many of these traders liquidate their assets immediately after the war of words between the two co-founders broke out. The mood only got worse, with CZ prompting users to transfer their holdings to Binance.

WazirX told Cointelegraph that there were some signs of liquidation and movement of funds in the wake of the tweets, but after assuring users that their money would be safe, the exchange said the trend has been down.

Related: Built to fall? When the CBDC sun rises, stablecoins may cast a shadow

Indian crypto-entrepreneurs believe that, regardless of who is at fault, the jumble of words on social media affected investor confidence. Sathvik Vishwanath, the co-founder of Indian crypto exchange Unocoin, told Cointelegraph that “such fracas affect the crypto market, including its investors.” He further added:

“This kind of action in the crypto market has a negative impact on the entire ecosystem, but the problem seems reversible. Either they need to complete the transaction or reverse the transaction and should publicly identify the owners. Transparency is the key here that seems to be missing.”

The Indian crypto ecosystem had flourished until now and produced several crypto unicorns over the past few years; however, with the implementation of a 30% crypto tax and 1% tax credit at source this year, trading volume on major Indian crypto exchanges has dropped dramatically. The recently implemented tax rules not only deterred Indian investors, but also prompted several leading crypto service providers to look for more crypto-friendly jurisdictions.

The Indian central bank has always called for a ban on the use of crypto in any form, while the central government has changed its stance over time without offering any regulatory framework. Amid growing complexity for the Indian crypto ecosystem, many market experts believe that the current Binance–WazirX saga could be used by Indian law enforcement agencies and the central bank to build a case against crypto regulations.