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India Regulates Crypto Transactions Under PMLA To Promote Accountability & Transparency

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On March 7th, the Ministry of Finance published a notification in The Gazette of India stating that several crypto transactions would be subjected to the Prevention of Money-Laundering Act (PMLA) 2002.

The move aims to regulate the crypto industry in India and requires all crypto businesses to perform necessary KYC (know your customer) and transaction monitoring as part of their process.

According to the notification, the Prevention of Money Laundering Act (PMLA) applies to financial services related to the sale and issuance of virtual assets.

These services encompass exchanging virtual digital assets for fiat currencies, transferring virtual digital assets, and managing or safeguarding virtual digital assets. Moreover, participating in and offering financial services related to the sale and issuance of virtual digital assets are also covered.

Under the PMLA, financial institutions must maintain records of all transactions for the past ten years, provide these records to officials upon request, and verify the identity of all clients. This development is being commended as a move towards promoting greater accountability and transparency in the cryptocurrency industry in India.

Founder of WazirX India, Nischal, tweeted in support of the move, stating that it was good progress towards regulating the crypto industry in India. With the notification in place, all crypto businesses in the country will come under the ambit of the PMLA.

While the notification doesn’t provide many details, it is a positive step towards ensuring that the crypto industry in India operates within a framework of regulations and guidelines.

As the industry continues to evolve and expand, it is crucial to establish clear guidelines that can protect investors and consumers alike. This move by the Ministry of Finance is a step in the right direction toward achieving that goal.

Indian Crypto Exchange Celebrates Birthday 

Meanwhile, Indian crypto exchange WazirX is celebrating its birthday and is inviting its followers to join in by submitting unique and creative birthday wishes. They have announced a giveaway of ₹55,555 worth of $WRX to 25 people who come up with the most original wishes. 

According to the tweet, to participate, users must like the tweet and quote it with their own special birthday message using the hashtag WazirXTurns5. The exchange has encouraged participants to be creative and think outside the box, allowing for anything from images to videos as long as it’s authentic and heartfelt.

Related Reading | Here’s Why Coinbase Received 40K BTC From US Government 

Binance And WazirX: The Clash Of Crypto Exchanges

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According to a blog post on Friday, Binance has requested Zanmai Labs, the company running the Indian cryptocurrency exchange WazirX, to negotiate terms for withdrawing any remaining funds stored in Binance wallets.
The answer purports to allay concerns about what would happen to customer funds if Binance and WazirX decided to cancel their partnership.

Binance stated,

“As an exception, we have invited Zanmai to work out arrangements with us to withdraw any remaining assets in the relevant accounts after 3 February. However, the responsibility ultimately lies with the Zanmai team to make the withdrawals expeditiously.”

However, it has been reported that WazirX has not responded yet.

Did Binance Lie About Ownership Disputes At WazirX?

The ownership of WazirX was undisputed in November 2019 after Binance, the largest cryptocurrency exchange in the world by trading volume, announced that it had acquired the Indian exchange in a blog post. Executives from WazirX openly discussed the acquisition. The narrative began to shift, though, when WazirX got into trouble with the Indian authorities last summer. Indian authorities searched WazirX’s Mumbai office in the first few days of August on the theory that the exchange had assisted 16 fintech companies in money laundering.

Binance moved right away to officially disassociate itself from WazirX. The original announcement of the acquisition on the former’s blog was changed to reflect that the deal was “limited to an agreement to purchase specific assets and intellectual property.” Changpeng Zhao (CZ), CEO of Binance, stated in a tweet on August 5 that the company “does not own any equity in Zanmai Labs, the entity operating WazirX.” A representative for CZ’s firm told the local media that the claims that the CZ-led-firm owned WazirX were “lies.”

The ownership of the Indian exchange was the subject of months of public back and forth between WazirX and Binance, during which the latter maintained that the transaction never actually happened. Officials from WazirX said that it did and that they had proof, however, they never released it.

In the early morning hours of January 26, an Indian national holiday, Binance delivered WazirX a letter stating that the Indian exchange must comply with two conditions by the end of the month or face having its service agreement with WazirX terminated by CZ’s exchange by February 3.

First, CZ’s exchange instructed WazirX to repudiate previous claims that CZ’s exchange controlled WazirX by publishing a pre-written “clarificatory statement” that was provided by CZ’s firm. WazirX was also compelled to remove all references to CZ’s firm from its terms of service.

Indian Crypto Exchange WazirX Discloses Proof Of Reserves

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India’s prominent crypto exchange WazirX has published its proof-of-reserves with 90% of user assets stored in Binance-based wallets, with the remaining 10% held in both hot and cold storage wallets.

This demonstrates a reserves-to-liability ratio of greater than 1:1 and is equivalent to approximately $256.5 million and $28.5 million, respectively.

According to the report, WazirX has nearly $285 million in total user assets displayed in the Tether stablecoin at the time of writing. 

Using CoinGabbar, a third-party crypto asset tracking platform to release its proof of reserves, the trading firm cites the latest action as an act of transparency.

According to the trading platform, it has the highest amount of reserves among all the crypto exchanges in India.

“We are not only India’s largest crypto exchange by volume but also India’s largest crypto exchange by reserves.”

Drilling deeper, Shiba Inu [SHIB] account for the company’s largest holding, comprising 19 percent of all reserves. 6.09 trillion SHIB tokens, worth $54.2 million, are currently held by WazirX.

Bitcoin and Ethereum come after it. The value of the firm’s 1,356 Bitcoin is $23.6 million. The PoR said that it holds 20,057 Ethereum tokens worth $26.6 million.

Digital asset service providers across the globe have rushed to publicize their reserve funds following the mass hysteria and chaos sparked by the FTX liquidity and bankruptcy scandal.

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Indian Crypto Exchange WazirX Discloses Proof Of Reserves 2

But it was Binance that paved the way for others to disclose their PoR. Founder Changpeng Zhao a.k.a CZ announced that the largest crypto exchange in the world by trading volume would start publishing the Merkle-tree proof of reserve.

It’s interesting to note that WazirX and Binance got into a spat about ownership control after the latter claimed last August that it didn’t own the Indian platform despite revealing the acquisition two and a half years prior.

Binance And WazirX Ownership Issue

In a blog post published at the end of 2019, Binance announced the acquisition of WazirX. The official blog article included the Binance executive’s excitement for the transaction along with a picture of Zhao and the WazirX founders.

However later in a series of tweets, CZ said that the firm has been “trying to conclude the deal for the past few years,” but hasn’t completed the transaction yet citing “a few issues” that he declined to elaborate on.

The clarification came after India’s Enforcement Directorate froze WazirX’s assets worth over $8 million, citing a suspected violation of foreign exchange rule.

WazirX: India’s ED Unfreezes Crypto Exchange’s Bank Account

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WazirX brings some good news to its users. After more than a month, India’s financial crime-fighting agency announced on Monday that WazirX’s bank accounts had been unfrozen. The exchange is connected to Binance, the largest digital currency exchange in the world.

The company was under investigation by the federal Enforcement Directorate (ED) last year for alleged violations of foreign exchange laws, and its assets worth $8.16 million worth of rupees were frozen. View More

The exchange claimed that it is now able to carry on with regular banking operations.

“After an in-depth internal investigation, WazirX noticed that most of the users whose information was sought by ED were already identified as suspicious by WazirX internally and were blocked in 2020-2021.”

The exchange stated in a blog.

WazirX stated that it cooperated with the investigators

According to the exchange, it has worked with the investigators by giving them all the pertinent facts, information, and documentation regarding the alleged accused businesses that used its platform.

Changpeng Zhao, the chief executive of Binance, revealed last month that the purchase of WazirX, which was announced in 2019, was never finalized. But CEO Nischal Shetty was of the opinion that the deal was completed.

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WazirX: India's ED Unfreezes Crypto Exchange's Bank Account 4

Finance Minister Nirmala Sitharaman presided over a meeting on September 8 about the apps, which also witnessed participation by the Deputy Governor of RBI, and brought the “illegal loan apps” scam with connections to China into the public eye.

The ED raided the exchange’s director Sameer Mhatre’s properties on August 5 for reportedly assisting “approximately 16 accused industry players in laundering the criminal proceeds using the crypto route,” freezing $8.1 million in assets held by the exchange.

Cryptocurrency balance freeze of Vauld: Indian saga

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The cryptocurrency accounts of Bengaluru-based Yellow Tune Technologies, a provider of financial services, have been blocked, according to a Friday announcement from India’s Directorate of Enforcement (ED). Flipvolt, the Indian division of Singapore’s Vauld, held some of the accounts. The action is related to an ongoing investigation into money laundering by instant loan companies with ties to China. The organisation has intervened in the cryptosphere in relation to that matter twice this week.

After determining that Yellow Tune was a shell company formed by two Chinese nationals using aliases, the financial watchdog declared it was freezing the company’s bank balances, payment gateway balances, and balances in the Flipvolt cryptocurrency exchange for a total of 3.7 billion rupees, or $46.4 million. Newspaper reports claim that the ED spent three days searching locations connected to Yellow Tunes.

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Source: Press Release

The ED discovered 23 entities that had put money into Yellow Tune’s Flipvolt wallets before sending it elsewhere. The ED gave Flipvolt harsh criticism for how company handled the money. The agency further stated,

“Lax KYC [Know Your Customer] norms, loose regulatory control of allowing transfers to foreign wallets without asking any reason/declaration/KYC, non-recording of transactions on Blockchains to save costs etc, has ensured that Flipvolt is not able to give any account for the missing crypto assets. It has made no sincere efforts to trace these crypto assets.”

Cryptocurrency exchanges suspected by ED

The Enforcement Directorate (ED) of India is investigating cryptocurrency exchanges that may have handled transfers from companies under investigation to foreign wallets totaling more than 10 billion rupees, or nearly $130 million. ten cryptocurrency exchanges, at least, are apparently implicated.

However, local publications stated that WazirX, a cryptocurrency exchange, had its bank account suspended.

In a case involving rapid loans, it is claimed that organisations under investigation conducted transactions of up to 1 billion rupees ($1.3 million), or $1.3 million, in the names of individuals who had no relation to the money. These companies frequently had ties to China. Even though anti-money laundering and know your customer procedures indicated that the transactions were suspicious, neither enhanced due diligence nor suspicious transaction notifications were submitted to the ED.

Furthermore, WazirX bank accounts containing 647 million rupees ($8.1 million) were frozen by the ED. claiming that roughly 16 fintech companies under investigation for money laundering received assistance from the exchange.

Vauld’s Legal Woes Mount After ED Freezes Assets Worth $46M

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Crypto exchange Vauld has become the latest target as India‘s Enforcement Directorate or ED froze assets worth Rs 370 crore [$46 million] on 11 August. The move comes at a time when the Singapore-based startup filed for bankruptcy after citing “financial difficulties”, a month ago.

In a statement to TronWeekly, Vauld said,

“We are still expecting more clarity on the same. We’ll keep you updated as soon as we have additional details.”

Meanwhile, India’s top enforcement agency has launched a nationwide investigation, cracking whips on a number of homegrown Non-Banking Financial Company [NBFC] firms and their fintech associates alleging “predatory lending practices” in violation of the RBI guidelines.

This development comes after ED froze nearly $8 million worth of bank assets belonging to cryptocurrency exchange WazirX’s director Sameer Mhatre in connection with a money laundering investigation.

ED also conducted raids on one of the directors of Zanmai Labs Pvt Ltd, which owns the cryptocurrency platform.

On August 9, Zanmai Lab released a statement, “WazirX is a platform co-operated by Zanmai Labs Pvt. Ltd. (Zanmai Labs) and Binance. Zanmai Labs has a no-tolerance policy towards any illegal activities using WazirX.”

Vauld And How Many To Go…?

In response, Binance chose to dissociate itself from the Indian exchange. CEO Changpeng Zhao denied owing a stake in WazirX’s parent entity Zanmai Labs.

“Binance does NOT have control over operations including “user sign-up, KYC, trading and initiating withdrawals”, as stated earlier. WazirX’s founding team controls that. This was never transferred, despite our requests. The deal was never closed. No share xfers,” Zhao stated on Twitter.

It also disabled “off-chain fund transfers” between the two platforms from August 8. Off-chain transfers are among the key issues cited by the probing agency in the money-laundering case, sources familiar with the matter disclosed.

The uncertainty over the ownership and probe by ED has triggered panic among investors who are left with no choice but to seek out other platforms.

As a result, WazirX’s trading volume witnessed a sharp 50% decline on its platform, while its native token WRX plummeted from ₹23 per coin earlier this month to ₹17 on 10 Aug.

That said, after ED froze a bankrupt Vauld’s assets, one wonders who would be the next in line of fire.

Binance and WazirX: Clash of the Exchanges

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The founders of the Binance and WazirX are engaged in a verbal battle, swapping accusations and denials on Twitter, a day after Binance CEO Changpeng Zhao claimed that the international cryptocurrency exchange didn’t own a stake in WazirX’s parent company Zanmai Labs.

However, the founder of WazirX says otherwise. Nischal Shetty, the creator of WazirX, stated on Saturday that Binance’s parent firm was a party to the agreement his company made. Shetty took to Twitter to express his opinions.

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Source: Twitter

He continued by saying that WazirX technology was sold as part of the deal. He added that CZ’s company then licenced the same technology to Zanmai for the INR market.

WazirX is run by an Indian company called Zanmai Labs. According to company papers, Zettai Pte Ltd, a Singapore-registered firm, owns 99.99 percent of the Indian entity and 0.01 percent is held by Shetty. According to a source, Shetty, cofounder Siddharth Menon, and Sameer Mhatre are all equal owners of Zettai.

Funds on Wazirx to transfer to Binance?

CZ took to Twitter on 6 August 2022 to advise WazirX users to move their money to Binance. He continues by saying that his company could technically disable WazirX wallets, but they can’t or won’t. CZ assures users that his firm can’t and won’t hurt users.

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Source: Twitter

According to sources, as of February, WazirX had more than 10 million registered users.

CZ claims that the WazirX founding team continued to be in charge of platform operations and that Binance was never granted access to user information, control over KYC, etc. He continues by saying that his company would be thrilled to cooperate with ED to address these problems with WazirX.

WazirX and Binance’s relationship has soured as a result of the Enforcement Directorate (ED) announcing on Friday that it had recently searched the offices of Zanmai Labs’ directors and had given them an order to freeze their bank balance of Rs 64.67 crore.

The government claims that WazirX “actively” assisted about 16 fintech firms that are under investigation for alleged money laundering to shift alleged criminal proceeds using cryptocurrencies. According to local sources, ED is requesting data from a number of cryptocurrency exchanges under the Foreign Exchange Management Act (Fema). WazirX has also been charged by the ED with having a convoluted ownership structure.

Indian Crypto Exchange WazirX Issued Notice For “Mysterious Transactions”

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Indian crypto platform WazirX has been served a show cause notice [SCN] for allowing outward remittance of crypto assets to the tune of 2790 crore to unknown wallets, the Ministry of Finance told the Upper House on August 2. 

The exchange is currently under the scanner of the nation’s law enforcement agency- The Directorate of Enforcement [ED] which is investigating two cases against the former under the provisions of the Foreign Exchange Management Act, 1999 [FEMA],

The first case is about Zanmai Labs, which operates WazirX, for using the walled infrastructure of Binance. Secondly, the agency accused the platform of allowing foreign users to convert one crypto into another by using transfers from third-party exchanges namely FTX, Binance, etc.

Further, it has been found that all crypto transactions between these 2 exchanges were not even being recorded on the blockchains and were thus cloaked in mystery. Accordingly, a show cause notice (SCN) has been issued under the provisions of FEMA against WaxirX for allowing outward remittance of crypto assets worth Rs 2,790 crore to unknown wallets.

Last month ED also sent out notices to a number of exchanges including WazirX to seek details about customer transactions.

WazirX Was Fined $5 Million For Alleged Tax Evasion

Last year, the Goods and Services Tax [GST] Department started probing into the activities of cryptocurrency exchange WazirX for allegedly evading Rs 40.5 crore in tax. The authorities said it recovered Rs 49.2 crore from the firm – the GST owed plus interest and penalties.

The indirect tax department revealed that WazirX issued its own cryptocurrency- WRX coins through Zanmai Labs without paying GST on it.

At that time, a spokesperson denied the allegations saying that they have been paying GST every month and there seems to be ambiguity around the tax framework.

As reported by TronWeekly, Indian Finance minister Nirmala Sitharaman stated in Parliament that a decision of banning or regulating crypto assets will only take place after proper consultation with global stakeholders weighing on the risks and benefits.

In a written response, Sitharaman said this is to prevent ‘prevent regulatory arbitrage.’

The latest development comes at a time when the Indian crypto industry is struggling with new taxation rules and a massive drop in its daily trading volumes.

WazirX’s Co-founders set sail for Dubai, more to follow?

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Indian cryptocurrency exchange WazirX’s co-founders, Nischal Shetty, and Siddharth Menon have reportedly moved to Dubai with their families, as per local sources. At present, the trading platform continues to operate from its headquarters in Mumbai.

A representative of the firm denied rumors of shifting its headquarters from India saying that all employees of the cryptocurrency exchange, are working remotely. Another co-founder and chief technology officer Sameer Mhatre continue to operate from India, the report said.

“We are a remote-first organization with employees in over 70 locations. This gives all the company employees the option to work from anywhere, subject to their comfort and convenience unless they are required to travel officially.

WazirX is headquartered in Mumbai and there is no change in any of our operating procedures. It is business as usual,” the WazirX spokesperson told CNBC-TV18.

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WazirX's Co-founders set sail for Dubai, more to follow? 9

Sources earlier hinted that Shetty and Menon would be stepping down from the active daily operations at WazirX to focus on new projects.

WazirX founders set sights on Web3

A few months ago, Shetty announced he was working on a sharded layer 1 blockchain project called ‘Shardeum with US-based crypto innovator Omar Sayed. At the same time, Menon said he too would be launching Tegro, a Web3 game ecosystem marketplace, with game development firm SuperGaming.

But one cannot ignore the fact that India’s stiff crypto tax and hostile banks in contrast to the crypto-friendly nations such as Dubai, Singapore, Mauritius, and the Cayman Islands have pivoted domestic crypto businesses to shift their base. With Dubai being the nearest one, many Indian-based entrepreneurs, developers, and engineers thus see it as a viable alternative.

In a previous report by TronWeekly, Shetty has warned earlier how India stands to lose homegrown talent and miss out on the Web3 revolution. He then urges the govt, to reconsider its stance on digital assets

Four years ago, crypto exchanges ZebPay and Vauld moved to Singapore. Other firms like Polygon too, shifted to Dubai, while Mudrex set up shop in the US in 2019. Shilpa Mankar Ahluwalia, Partner and Head-FinTech at Shardul Amarchand Mangaldas & Co told,

“The lack of clarity on what the crypto regulatory framework will look like is making investors rethink their decision to make India the base for launching crypto platforms and products.”

Indian Crypto Exchanges’ Rupee Ban Spurs Panic Among Investors

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Indian Investors were left shocked after the two most prominent crypto exchanges CoinSwitch Kuber and WazirX have disabled rupee deposits for the purchase of cryptocurrency through a widely-used state-backed transfer network.

This has caused a massive public outcry as the clamor for regulatory clarity grows. The alarming development comes after the National Payments Corporation of India, operator of the state-backed United Payments Interface (UPI), which enables bank transfers, said it was unaware of its use by any crypto exchange.

Following the news, users took to Twitter to vent their frustrations. One user questioned the abrupt move saying that the platform should have informed beforehand. “CoinSwitch was not allowing users to load deposits on its app, although they could still withdraw funds. “You have closed the INR deposit without any information At least let us know how long it will be closed,” the tweet read.

Another posted a screenshot of their conversation with the customer service, apparently frustrated with the response. CoinSwitch, which reportedly has more than 15 million users, did not immediately respond to the development.

A source close to the matter said the decision by CoinSwitch to stop UPI acceptance was due to “regulatory uncertainty” after the NPCI statement. Another Indian trading platform WazirX also told users on Twitter, “UPI is not available,” adding that it had no estimated time limit to fix the issue.

In a statement, WazirX said its deposit facility via UPI had been put on hold in December but declined to elaborate. On April 1, Indian crypto users had raised alarm when the firm revealed that it was disabling rupee deposits via popular payments app MobiKwik “until further notice.”

Indian expert calls for regulatory clarity

In the month of February, India decided to tax income from cryptocurrencies and other digital assets at 30%, signaling that authorities recognized digital currencies, but refused to put them under a legal ambit dashing hope for millions of investors and the crypto industry in general.

Regulatory clarity is the need of the hour,” said Abhishek Malhotra, a founding partner of TMT Law Practice. “There are currently a lot of conflicting signals on the regulatory regime, leading to lack of certainty.”