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Police Tactics Chill India’s Crypto Winter

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If success has many fathers, then a crypto exchange in the eye of a money laundering storm has been orphaned.

After Indian law enforcement froze $8 million worth of WazirX assets, Binance CEO Changpeng Zhao denied owning the country’s largest crypto exchange. Binance’s November 2019 blog post, which 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 has not purchased any stake (and does not own any stake) in Zanmai Labs, the entity operating WazirX and created by the original founders.

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

CZ, as Binance’s CEO is commonly known, will not be foolish enough to enter the lair of India’s dreaded law enforcement leadership to claim Zanmai. Certainly not after the ED’s August 5 press release which alleges that Zanmai owns WazirX – and that the crypto exchange has been used to launder money by predatory Chinese lending apps. (In a press release, Zanmai said it cooperates the platform with Binance and is in the position of any other intermediary “whose platform could have been misused.”)

The dubious apps rented the balance sheets of Indian non-bank lenders and disappeared along with their illegal profits. “The maximum amount of funds was diverted to the WazirX exchange and the crypto assets thus purchased were diverted to unknown foreign wallets,” management said, adding that Zanmai officials “give contradictory and ambiguous answers to escape to the oversight of Indian regulatory agencies”.

What monitoring? The Reserve Bank of India, the banking regulator, hates crypto. In 2018, the RBI asked banks not to entertain customers who traded in virtual currencies. Exchanges like WazirX, then a young startup, survived the draconian diktat by limiting itself to facilitating person-to-person transfers. In 2020, the industry breathed a sigh of relief when India’s Supreme Court ruled the RBI ban 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 stablecoin TerraUSD may have convinced the RBI that its dismissive stance was the right one. RBI Governor Shaktikanta Das called cryptocurrencies a “clear danger” in Singapore last month. Its host country – a much smaller economy – has also taken a few hits in this year’s turmoil, most recently with the freezing of payments at crypto lender Hodlnaut, which in principle acquiesced to a license under the Securities Act. Singapore payment services. The approval was rescinded, but the limited fallout on the local financial system means the monetary authority does not view crypto as a systemic risk. It’s not something the city-state is going to ban.

India could also have said that if people are going to play with dangerous chips anyway, let’s make sure they don’t hurt themselves or others. By showing little interest in regulating digital assets, the RBI has left the industry in a bad way. Thanks to a recent Indian Supreme Court ruling, the law enforcement branch has almost unlimited powers to make arrests and searches, seize property and take self-incriminating statements. Bail is almost impossible and the burden of proving innocence rests with the accused. A few more scandals, and ED could get the shutdown the RBI has long wanted: India’s considerable talent in this area will flee to more welcoming jurisdictions like Dubai.

If a comparison to a global financial hub like Singapore isn’t very helpful, perhaps India should look to Thailand for inspiration. There, existing digital regulations are being changed to actively create a role for the central bank in protecting investors in licensed entities like Zipmex (Thailand) Ltd., a cryptocurrency exchange that briefly suspended coin withdrawals. . All the RBI wants, meanwhile, is a blanket ban on crypto because “you can’t regulate something that you can’t define.”

Lame apologies like this have led to the current bizarre situation where no one is coming forward to claim parentage to India’s largest crypto exchange. That’s exactly what you get by letting the risk of prison do the work of adult supervision. The law enforcement authority in its press release criticized WazirX for its alleged lack of due diligence: “No physical address verification is performed,” it said. “There is no control over the source of their clients’ funds.” If this picture of a lawless land is true, then much of the blame lies with the dangerous disinterest of the RBI. Letting the law enforcement leadership add its own deterrent effect to the crypto winter will cause the industry to shrivel up and die.

More from Bloomberg Opinion:

• Coinbase’s “end of the story” is just the beginning: Lionel Laurent

• Crypto emerges from the shadows in India: Andy Mukherjee

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

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

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

More stories like this are available at bloomberg.com/opinion