ED serves notice to WazirX, directors for crypto transactions worth over $380 mn

India’s Enforcement Directorate (ED) said on Friday afternoon that it had issued a show cause notice to cryptocurrency exchange WazirX for violation of the country’s Foreign Exchange Management Act (FEMA), 1999, in relation to transactions involving cryptocurrencies worth Rs 2,790.74 crore (about $382 million). 

The notice has been served to WazirX parent entity Zanmai Labs and directors Nischal Shetty and Sameer Hanuman Mhatre after a FEMA investigation on the basis of the ongoing money laundering investigation into Chinese owned illegal online betting applications, ED said in a statement. 

ED has issued Show Cause Notice to WazirX Crypto-currency Exchange for contravention of FEMA, 1999 for transactions involving crypto-currencies worth Rs. 2790.74 Crore.

— ED (@dir_ed) June 11, 2021

“During the course of the investigation, it was seen that the accused Chinese nationals had laundered proceeds of crime worth Rs 57 Crore approximately by converting the INR deposits into cryptocurrency Tether (USDT) and then transferring the same to Binance (exchange registered in Cayman Islands) wallets based on instructions received from abroad,” the statement added. 

WazirX is a platform that allows trading of cryptocurrencies such as Bitcoin token BTC, Ethereum token ETH, Tether token USDT, Polygon token MATIC, its own token WRX, meme tokens Dogecoin’s DOGE and Shiba Inu’s SHIB. 

The ED said that the Mumbai based startup allows for a wide range of transactions with cryptocurrencies including transfers and receipts of the virtual tokens held in its pool accounts to wallets of other exchanges which could be held by foreigners in foreign locations. 

The statement added that WazirX does not collect the requisite documents in clear violation of the basic mandatory anti-money laundering (AML) and combating of financing of terrorism (CFT) precaution norms and FEMA guidelines. 

In the period under its investigation, the ED said, users of WazirX via a pool account have received incoming cryptocurrency worth Rs 880 crore from Binance accounts and transferred out cryptocurrency worth Rs 1,400 crore to Binance accounts. 

“None of these transactions are available on the blockchain for any audit/investigation. It was found that the WazirX clients could transfer 'valuable' crypto-currencies to any person irrespective of its location and nationality without any proper documentation whatsoever, making it a safe haven for users looking for money laundering/ other illegitimate activities,” the statement concluded. 

In response, founder and CEO of the Binance backed startup, Nischal Shetty, took to microblogging platform Twitter. 

“WazirX is yet to receive any show cause notice from the Enforcement Directorate as mentioned in today's media reports. WazirX is in compliance with all applicable laws. We go beyond our legal obligations by following Know Your Customer (KYC) and AML processes and have always provided information to law enforcement authorities whenever required,” Shetty said in a series of Tweets.  

“We are able to trace all users on our platform with official identity information. Should we receive a formal communication or notice from the ED, we'll fully cooperate in the investigation,” he added. 

1/3

WazirX is yet to receive any show cause notice from the Enforcement Directorate as mentioned in today's media reports.

WazirX is in compliance with all applicable laws.

— Nischal (WazirX) ⚡️ (@NischalShetty) June 11, 2021

Late last month, the Reserve Bank of India notified all commercial and co-operative banks, payments banks, small finance banks, non-banking financial companies and payment system providers against using its 2018 circular on cryptocurrency prohibition in the country. 

“Banks, as well as other entities addressed above, may, however, continue to carry out customer due diligence processes in line with regulations governing standards for KYC, AML, CFT and obligations of regulated entities under Prevention of Money Laundering Act, (PMLA), 2002 in addition to ensuring compliance with relevant provisions under FEMA for overseas remittances,” RBI chief general manager Shrimohan Yadav had said.  

While no legal construct currently deems cryptocurrencies illegal in India, no law also recognizes its existence. RBI however said in January that it was exploring whether there was a need for a digital version of fiat currency or Central Bank Digital Currencies (CBDC) and in case there was, then how to operationalise it.