In an endless stream of appeals for help, social media platforms such as X (formerly known as Twitter) have been awash with posts by people who traded or invested in crypto on the crypto trading platform WazirX pleading to get their money back.
What happened to their investments and why is there so much panic amongst users of the platform? In July, WazirX, one of India’s largest cryptocurrency firms was hit by a cyber-attack. More than $230 million of users’ holdings were stolen—accounting for close to half of the platform’s reserves. WazirX describes this $230 million wipeout as a “force majeure event” beyond its control.
While the exchange says it has filed an FIR, and is in touch with agencies including the Federal Bureau of Investigation in the US, there is still no sight or sound of the funds. The hope is that these crypto tokens are trackable and traceable, so when an attempt is made to launder the crypto funds in return for cash, it will raise an alert and withdrawals can be frozen.
An equitable solution?
The real drop curve though came in the aftermath of this attack. WazirX CEO Nischal Shetty tweeted about potential solutions to the problem on X. Shetty proposed a “socialized loss strategy”, seeking to distribute the impact across all users equitably. The company proposed a 55-45 approach for the remaining user funds, where 55 per cent of user crypto assets would be made available for trading or withdrawals depending upon the option selected by the user. However, the remaining 45 per cent would be locked until WazirX could recover its stolen assets.
Essentially, public money would help a private company dig its way out of this crater-sized financial hole. Whether or not this was agreeable to platform users would be decided via an online poll. The idea saw an uproar amongst users and WazirX was forced to clarify this was neither legally binding nor the best solution. It has now scratched that idea and gone back to posting on social media, asking for more time and possible solutions from all.
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The event has unfolded in several incredulous ways. First, that the company seems to be a law unto itself, attempting to solve this crisis via social media polls and unilateral decisions. For all practical purposes, WazirX is now effectively closed after the exchange stopped trading and withdrawals following the hack. There is no clarity on how the hack occurred and who caused it, nor on how much money was held on its books as the management says sharing that information may “open up a new attack vector for someone right now.” In actual fact, it is unclear who even owns the company as Binance and Zanmai Labs, the Singapore-based parent of WazirX, have been locked in a public spat around the ownership of the Indian exchange since 2022. There is no whisper of what should be the logical course of action for WazirX, filing for bankruptcy.
Wazir X itself has had several run-ins with the Enforcement Directorate; in August 2022, there was an order to freeze the company’s bank balances pending money laundering investigations and in January an investigation into a gaming app fraud led to the discovery of several “mule accounts” used to purchase cryptocurrencies, many of which were based in WazirX.
By its own account, the platform added 6,00,000 new users in 2023, taking the total tally to over 15 million registered users on their website. The top crypto tokens on WazirX have the highest number of traders in the age group of 26-40 and the highest number of traders are based in Uttar Pradesh, Maharashtra, Tamil Nadu, Gujarat, and Haryana.
Second, the size and enormity of this event raises an obvious question: who’s in charge? In a three-way ping pong match, crypto and any clear regulation around it has been bounced between the Finance Ministry, the Central Bank, and SEBI. The RBI has always been clear it has no love lost for this industry, and frequently suggested there should be a ban on crypto. SEBI most recently batted for shared oversight where the markets regulator could monitor cryptocurrencies while the RBI could be in charge of regulation and investor grievances in cryptocurrencies could be resolved under India’s Consumer Protection Act.
Lack of clarity
That also brings us to the Finance Ministry in whose hands India’s crypto policy has largely been so far. Neither fish nor fowl, legal nor illegal, the Finance Minister has steadfastly refused to clarify what its view is on crypto. What it has been clear about, is that there’s definitely tax to be earned here. In the 2022 budget, however, stringent income tax rules were announced for crypto. Income earned from these transactions is taxed at 30 per cent with no deductions. Even more, losses cannot be offset against other income or carried forward to future years.
In a situation where scores have lost their money on a crypto exchange, that is both recognised by the Finance Ministry and has been an active participant in every roundtable discussion on crypto, what has the Finance Ministry’s response been so far? There is radio silence on what platform users should now do, what efforts are being made to investigate this hack or on how this will be resolved.
Cryptocurrency platforms are apparently required to register with FIU-IND, a part of the Finance Ministry’s Department of Revenue. Has there been any communication from the department on the next steps? In its zeal to follow the “if it moves, tax it” policy there hasn’t even been a basic clarification on what tax deduction there could be in the event of a hack such as this. If the funds are not recovered and users have to take a haircut on their crypto assets, will people still have to pay taxes on their gains?
And third, the central point is this. Whatever the government’s stand on cryptocurrencies and their legality may be, how is a recognised private company in India making ad hoc announcements around “socialisation” of losses that amount to several hundred million? If this trading platform is allowed to exist and so are trading accounts, how did it come to pass that one of the largest hacks in recent history struck an Indian company, and yet it has elicited not even a statement from the Finance Ministry?
Absence of regulation
As “India Ka Bitcoin Exchange”, or India’s Bitcoin exchange as it calls itself, sinks like a stone with not a squeak from any of India’s regulators, it is a sad reflection of how little value is accorded to checks and balances in the Indian entrepreneurial ecosystem. Seasoned policymakers often pointed out deep flaws in how the central government chose to engage on issues related to crypto and policy regulation. Discussions were often limited to a small clique that included crypto exchange founders such as WazirX who kept rallying for self-regulation which is the surest route to disaster for any industry that deals with the funds of a wider public.
What is clearly evident is that the Finance Ministry has chosen to drag its feet on any cogent policy around the space. There has been until now, not one statement providing clarity on the WazirX hack and what happens next from either the Central bank or the Finance Minister. This should not come as a surprise, considering the Cryptocurrency Bill was scheduled in 2021 and is still waiting to be tabled, discussed, or debated. Even more shameful given the lesson all governments should draw from the massive and widely reported FTX implosion that happened in the US through 2022 and 2023.
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How many crypto users does India have? We do not know. The numbers swing wildly based on reports that are often compiled and shared by these crypto platform exchanges. One estimate for 2023 places it at 19 million cryptocurrency investors, another points to over 107 million users by 2025. It is all over the place because it has been allowed to be that way. WazirX, which has been a poster boy for crypto platforms in India is in deep and dark waters. Instead of firm messaging on the alleged hack, plans for the exchange, and account holders’ funds, what have we heard in the last few weeks? One, that there is currently no proposal to bring legislation for regulating the sales and purchase of virtual digital assets in the country, and two that Binance, whom WazirX reportedly approached for help to bail out its affected customers has been slapped with a tax show-cause notice for nearly $86 million by the Ahmedabad chapter of the Directorate General of Goods and Services Tax Intelligence (DGGI).
Should one assume that the core role for India’s Finance Ministry is now tax collection from any and every entity, while accountability, scrutiny and policy are filed under the nice-to-haves but not crucial category.
There must absolutely be a firm check on money laundering, violations of tax rules, and currency irregularities. What the country’s financial regulators must also do is step up and speak up when companies that hold public money turn turtle.
As the WazirX hack and its repercussions unfolded, users of the platform reacted with shock, fear, and desperate humour. A meme was quickly shared in crypto communities depicting the Finance Minister with the caption: “Hackers will also have to pay 30 per cent tax.” It would be funny if it were not so close to the truth.
Mitali Mukherjee is Director of the Journalist Programmes at the Reuters Institute for the Study of Journalism, University of Oxford. She is a political economy journalist with more than two decades of experience in TV, print and digital journalism. Mitali has co-founded two start-ups that focussed on civil society and financial literacy and her key areas of interest are gender and climate change.
