Police tactics chill India’s crypto winter

However, one of these founders disputes this version of the agreement. Nischal Shetty, now based in Dubai according to media reports, claims that Binance actually controls WazirX – it owns the domain name and can shut down the platform. The only thing that is not under the thumb of the world’s largest crypto exchange is Zanmai, argues Shetty. “Of course, if Binance wants control of Zanmai, they can buy shares,” he tweeted. So why isn’t it doing it, if as Shetty claims, it was interested in doing so as recently as February?

CZ, as the Binance CEO is popularly known, will not be so foolish as to enter the lair of India’s dreaded Enforcement Directorate to claim Zanmai. Certainly not after the ED’s August 5 press release alleging that Zanmai owns WazirX – and that the crypto exchange was used to launder money by predatory Chinese lending apps. (In a press release, Zanmai said it partners the platform with Binance and is in the position of any other intermediary “whose platform may have been abused.”)

The dubious apps rented the balance sheets of Indian non-bank lenders and made off with their ill-gotten gains. “Maximum amount was diverted to WazirX exchange and crypto-assets purchased in this way have been diverted to unknown foreign wallets,” the directorate said, adding that Zanmai officials “give contradictory and ambiguous answers to avoid oversight by Indian regulatory agencies .”

What oversight? The Reserve Bank of India, the banking regulator, hates crypto. In 2018, the RBI instructed banks not to entertain customers who transacted in virtual currencies. Exchanges like WazirX, then a start-up, survived the draconian dictate by limiting themselves to facilitating person-to-person transfers. In 2020, the industry breathed a sigh of relief when India’s Supreme Court ruled that the RBI’s ban was unconstitutional. However, all that has happened since then is that the authorities have started taxing crypto trading, without bothering to regulate it.

The “crypto winter” caused by the collapse of the TerraUSD stablecoin may have convinced the RBI that its dismissive stance was the right one. RBI Governor Shaktikanta Das termed cryptocurrencies a “clear danger” in Singapore last month. His host nation – a far smaller economy – has also taken a few hits in this year’s turmoil, most recently with the suspension of payments at crypto lender Hodlnaut, which in principle has given the nod to a license under Singapore’s Payments Services Act. The approval has been withdrawn, but limited spillover into the local financial system means that the monetary authority does not see crypto as a systemic risk. It is not something the city-state is going to ban.

India could also have said that if people are going to play with dangerous tokens anyway, let’s make sure they don’t harm themselves or others. By showing little interest in regulating digital assets, the RBI has left the industry in a bad place. Thanks to a recent Indian Supreme Court decision, the Enforcement Directorate has almost unlimited powers to make arrests and raids, attach property and record self-incriminating statements. Bail is almost impossible, and the burden of innocence lies with the accused. A couple more scandals and the ED may achieve the shutdown RBI has long wanted: India’s considerable talent in this area will flee to more welcoming jurisdictions like Dubai.

If a comparison with a global financial center like Singapore is not very helpful, perhaps India should look to Thailand for inspiration. There, the existing digital regulations are being fine-tuned to actively create a role for the central bank in protecting investors at licensed entities such as Zipmex (Thailand) Ltd., a cryptocurrency exchange that briefly suspended coin withdrawals. All the RBI wants, meanwhile, is a blanket ban on crypto because “it is not possible to regulate something that cannot be defined.”

Lame excuses as it has led to the current bizarre situation where no one is coming forward to claim the origin of India’s largest crypto exchange. That’s exactly what you get by letting the risk of prison do the work with adult supervision. The enforcement agency in its press release took WazirX to task for its alleged lack of due diligence: “No physical address verification has been performed,” it said. “There is no control on the source of funds for their customers.” If this image of a lawless terrain is true, much of the blame goes to the RBI’s dangerous disinterest. Allowing the Enforcement Directorate to add its own chilling effect to the crypto winter will cause the industry to shrivel and die.

More from Bloomberg Opinion:

• Coinbase’s “End of Story” is just the beginning: Lionel Laurent

• Crypto comes out of the shadows in India: Andy Mukherjee

• A digital rupee has merits, but why the rush?: Andy Mukherjee

This column does not necessarily reflect the opinion of the editors or Bloomberg LP and its owners.

Andy Mukherjee is a Bloomberg Opinion columnist covering industrials and financial services in Asia. Previously, he has worked for Reuters, the Straits Times and Bloomberg News.

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