Binance, WazirX ownership fight has users in a fix

Synopsis

Meanwhile, Zanmai Labs, which operates WazirX in India, is exploring the legal route amid an ownership dispute with the world’s largest exchange by volume, according to sources.

WazirX will assist these budding entrepreneurs in obtaining funding by connecting them with eager venture capitalists. A public spat between global cryptocurrency platform Binance CEO Changpeng Zhao (known as CZ) and WazirX cofounder Nischal Shetty has hit about 15 million of the registered users (as of August) of the Indian crypto exchange.

Meanwhile, Zanmai Labs, which operates WazirX in India, is exploring the legal route amid an ownership dispute with the world’s largest exchange by volume, according to sources.

Zhao tweeted on Saturday that users on WazirX should transfer their funds to Binance, causing widespread panic, investors told ET.

“We could shut down WazirX. But we can’t, because…It hurts users,” CZ tweeted on Saturday.

A day later, Binance disabled off-chain transfers to WazirX, according to a user screenshot that ET has reviewed, severing users’ ability to transfer funds between the two exchanges internally. Off-chain transactions take place outside of blockchain.

Young crypto investors whose portfolios have been hammered by a decline in the prices of cryptos and the prohibitive tax regime in India have expressed concern over the safety of their funds on WazirX and the consequences of a soured relationship between the two companies.

Aditi Khandelwal from Jaipur withdrew all her funds from WazirX on Saturday.

As a retail investor, understanding an issue as complicated as the ownership structure of a company on Twitter was overwhelming, she said.

“My decision has been building up since Luna’s collapse. This week’s events were a tipping point,” the 24-year-old said.

Khandelwal was referring to the breakdown of Terra, a blockchain that ran “algorithmic” stable coins Luna and UST, in May. UST lost over 80% in value over a week, while Luna, its sister token, went from $118 in April to $0.0003 in mid-May.

“Right now, there is no user protection if I lose my money in the crypto market. Until and unless the crypto space is a bit regulated in India, I don’t think I will return to crypto even to experiment with a small amount of money,” Khandelwal, who cashed out of the crypto market at a 78% loss on her total investments, added.

Binance is intertwined with WazirX on multiple levels. The former provides wallet services to WazirX users, and is also a liquidity provider, sources said.

WazirX’s vice president Rajagopal Menon told ET that the cryptocurrency of users was safe.

“We are the only crypto exchange that allows complete withdrawals of cryptos in India, and that shows how solvent we are and how sensible our business model is. INR withdrawals are working, and there is no issue in terms of the structural viability of the company,” Menon said.

The Directorate of Enforcement (ED) on Friday conducted searches on one of the directors of Zanmai Lab Pvt Ltd, which operates WazirX, and issued a freeze order on its bank accounts worth Rs 64.67 crore.

“The sentiment within the newcomers is a bit low. I’ve moved my funds out of WazirX to Binance while this ED affair clears up. I’m sure the funds would be safe at WazirX, but as a professional trader, I cannot take the risk of any interruptions,” said crypto trader Shounak Shetty.

The volumes on WazirX have been trending at all-time lows since April 1 after digital wallet Mobikwik stopped lending its services to the platform for crypto-related payments and the new tax regime governing crypto came into effect.

Structuring
Since Friday, a war of words has ensued between Binance’s CZ and WazirX founder Shetty on Twitter over the ownership claim of WazirX and Zanmai Labs and what that ownership entails.

After announcing the acquisition of WazirX in 2019, CZ distanced himself from the operations of the Indian exchange for the first time on Friday after the ED action.

The two companies agree that Zanmai Labs is fully operated and owned by Shetty and cofounders and that in 2019 Binance acquired WazirX Technology (IP). The dispute stems from Binance denying it has any control over WazirX’s trading operations.

Sources told ET that Zanmai Labs was also exploring legal action against Binance.

The Binance-WazirX deal took place against the backdrop of a banking ban by the Reserve Bank of India in 2019 when trading on crypto exchanges in the country was all but decimated.

Shetty says the technology he sold to Binance was licensed to Zanmai by Binance for the Indian market after the banking ban was lifted.

According to Shetty’s Twitter feed, the final leg of the deal has been stuck over Binance not disclosing their parent entity. The operations are split between the two. The India entity operates INR-Crypto pairs while Binance oversees crypto-to-crypto pairs and processes crypto withdrawals, according to Shetty.

A lawyer told ET that the deal could have been structured in an “amphibious” manner purely because of the regulatory uncertainty in India, which could have led to WazirX’s founders accepting more legal risks.

“For any tech company, if you take away the IP and the platform, there is nothing else of value; Binance has taken everything away of value. They don’t want Zanmai because of the liability. The founders would have thought it was a good deal at that time, but what they didn’t realise was that Sebi (the Securities and Exchange Board of India) and RBI risk lies on them,” the senior lawyer, who has experience with such transactions, said.

Transfers between exchanges
On Sunday, Binance disabled off-chain transfers to WazirX, severing users’ ability to transfer funds between the two exchanges internally.

WazirX, on its part, started levying a fee to transfer funds to Binance from WazirX amid falling volumes due to the introduction of 1% Tax Deducted at Source on crypto transactions, according to a company blog post from July.

Binance did not respond to ET’s queries seeking comment on their decision to disable off-chain transfers. WazirX did not comment on introducing transfer fees.

ED had on Friday raised concerns about the “loose regulatory control of transactions between WazirX and Binance, non-recording of transactions on blockchains to save costs.”
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    Updated: 08/08/2022 — 19:00