Crypto exchange Binance, which had earlier said that it does not own equity in the operating entity behind Indian crypto exchange WazirX, said it had disabled “off-chain fund transfers between the two platforms from 8am on August 8. The move comes after the Enforcement Directorate, on August 5, said it had frozen assets of WazirX worth Rs. 64.67 crore.
“As a result of the recent regulatory action taken against Zanmai Labs Pvt Ltd, in relation to their operations of the WazirX Exchange, it has come to our attention that some users were given to believe that funds deposited in WazirX were managed by Binance. This is not the case,” said Patrick Hillmann, chief communications officer or Binance, in a statement.
“In order to provide clarity and protection for users, we are removing the off-chain fund transfer channel between WazirX and Binance. Effective from 2022-08-11 03:00 (UTC), Binance will cease to support off-chain fund transfers between WazirX Exchange and Binance via the ‘Login with Binance’ option. Users will still be able to deposit and withdraw balances via the standard withdrawal and deposit process between Binance and WazirX,” it added.
According to sources in the industry, off-chain transfers between the two companies are among the key issues cited by the ED. “Despite giving repeated opportunities, WazirX failed to give the crypto transactions of the suspect fintech APP companies and reveal the KYC of the wallets. Most of the transactions are not recorded on the blockchain also,” the ED said in a press release on August 5.
Off-chain transactions are used by crypto firms to avoid gas fees on blockchains. By enabling such transactions, WazirX users could transfer crypto assets between the two platforms without tapping the underlying blockchain.
Kashif Raza, co-founder of crypto education platform Bitinning, explained that such transactions allow assets to be transferred by entries being made on the two companies’ internal ledgers only.
Disabling off-chain transactions doesn’t mean that users won’t be able to transfer funds between the two platforms. However, they will now need to use “on-chain” transactions. Which means that they will have to enter their Binance Wallet Address on WazirX, and the transaction will be recorded on the relevant blockchain — Bitcoin for BTC transfer, Ethereum for ETH transfer, and so on.
In doing so, users will have to bear the ‘gas fee’ attached with blockchain transactions. The gas fee is the fee used to compensate miners on a blockchain. This cost is dynamic and can change based on network congestion, increasing when there’s more traffic on the network.
“The abrupt manner in which they have done it isn’t right though. They should have informed users first,” said Raza.
The ED investigation has shed new light on the deal between Binance and WazirX back in 2019. At the time, both companies had announced that Binance had acquired WazirX. However, in a series of tweets on August 6, Changpeng Zhao, the CEO of Binance, said that the “transaction was never completed” and Binance didn’t own any shares of Zanmai Labs, the entity that runs WazirX.
Nishcal Shetty, the founder of WazirX, however, tweeted that Binance had in fact acquired WazirX and Zanmai Labs was granted a licence to operate INR-crypto trades on the platform.