On December 30, 2021, GST officials raided the WazirX offices unearthing alleged tax evasion of ₹40.5 crore. Notably, Binance, the Chinese firm that owns WazirX is also being investigated by the United States Department of Justice, and the Internal Revenue Service of US, for money-laundering and tax-offenses.

WazirX is a curious case for Indian authorities as it is owned by a Cayman Island based company of Chinese origin, Binance. Since Indian exchanges in stocks, commodities and bonds cannot be completely owned by foreign entities, crypto exchanges, which are non-regulated entities so far, are becoming a haven for foreign investors and companies. Especially, due to lack of regulations in cryptos.

WazirX, the crypto exchange of Zanmai Labs Private Limited, was incorporated on December 21, 2017 under Mumbai Registrar Of Companies (ROC). In November 2019, the company was acquired by Binance, one of the largest crypto exchanges of the world. While such acquisitions have always thrilled the Indian start-up ecosystem, the implications of this are under the lens of authorities responsible for the nation's fiscal health.

Binance is a company that originated in China and later moved its registered office to Cayman Island, a tax haven. Companies based in such havens are being linked to violations of several national and international laws. The founder of Binance, Changpeng Zhao, was born in Jiangsu, China, but later shifted to Canada.

Notably, China has banned cryptocurrencies altogether and plans to issue its own sovereign digital currency, digital yuan. A cyber yuan stands to give Beijing power to track spending in real time, besides reducing its dependence on the dollar-dominated global financial system. Ironically, China-grown Binance, which can no longer operate in China, now has its blockchain-related activities in more than 180 countries across the globe. Including India, through WazirX.

A fortnight ago, Fortune India reached out to WazirX to enquire about how much stake Binance owns in WazirX. The company chose not to respond to Fortune India’s detailed questionnaire, despite repeated reminders.

However, the WazirX Whitepaper, that can be accessed on its own website, mentions the following:

"WazirX has been acquired by Binance. It will continue operating as an independent brand of Binance with a focus on P2P."

It adds: "We launched the world’s first auto-matching P2P engine in India when the Indian central bank banned banks from dealing with cryptocurrency businesses, and exchanges started shutting shops. As of today, WazirX P2P is the go-to method to deposit and withdraw INR in India, and is growing steadily. We don’t plan to stop with India. We’ll take P2P to more developing and underdeveloped countries and provide them with a simple fiat on-ramp solution that they deserve."

Conflict of interest

While no stock-exchange in India, or globally, is allowed, without scrutiny of conflict of interest, to have its own stocks listed in its own exchange, WazirX has issued its own crypto-coin WRX that is listed on the exchange.

WazirX claims a user base of more than 10 million, as of December 2021. All its Indian users have to register by disclosing detailed KYC data with the exchange. This includes bank details, UPI, PAN, citizen identity information (Aadhar, passport, or driving licence). The question is: Is this data available to Binance, a business of Chinese origin that is already being investigated for financial offenses in the US.

When asked about the custodianship of such sensitive user data and whether the data is stored with Binance, WazirX chose not to respond.

Fortune India questionnaire also asked WazirX whether its P2P exchange can also be accessed by foreign entities and whether non-Indian entities can sell crypto-currency or NFTs through the WazirX platform. WazirX did not respond to these questions. The reason why Indian crypto exchanges need to be transparent about the sellers of crypto-coins or NFTs is because Indian citizens and the government should be aware of the destination of the Indian fiat currency, the rupee.

Crypto-coins originate from non-sovereign, unknown sources. Any rupee spent on buying any crypto-coin from any of the exchanges involves someone selling the coin(s) at the other end. The seller of the coin(s) is hidden due to the very nature of the cryptocurrency. One of the potential pitfalls of buying cryptocurrency, from any source, is that the buyer does not know whether her money is going out of the country, or for what activities that money is being used. The same is true for NFTs.

A platform like WazirX, that facilitates peer-to-peer transactions by converting fiat currency to crypto currency for the buyer, and again, crypto-currency to fiat currency for the seller, may become a potential drain to Indian rupee if Indian citizens are enabled to purchase crypto-coins or NFTs from foreign entities.

The Parliamentary Committee on Home Affairs Report of 2021 expresses its concern about increasing use of crypto-currencies and "darknet" for drug trafficking. It notes that technology is being leveraged by drug traffickers to maintain anonymity and making it difficult to track the movement of drugs. The data was sourced from the Ministry of Home Affairs.

How will the government regulate a foreign company and protect its Indian users’ interests?

As speculation was rife about the content of the much anticipated Cryptocurrency & Regulation of Official Digital Currency Bill, 2021 that was slated to be tabled in Rajya Sabha in the winter session, WazirX told users to ‘keep their faith in the law-makers’ in its official blog. WazirX founder, Nischal Shetty went public about bringing governmental regulations to the crypto industry.

But the million-dollar question is: what precisely would the government be able to regulate when a foreign company like Binance controls the access, funds, investments, and data of more than 10 million Indians operating through WazirX?

Even if the government becomes privy to all financial transactions done by an Indian buyer or seller through stringent KYC and linked bank accounts, there would be no way to check the credentials of the person on the other end of the transaction. Also, there will be no way to figure out the ultimate destination of buyer’s money or to stop the outflow of money from Indian shores.

The February 2019 report of the Inter-ministerial Committee to propose specific actions to be taken in relation to virtual currencies recognises dangers of cryptocurrency and recommended a complete ban on any cryptocurrency that is not issued by the state. The previous draft bill had also defined mining, holding, selling, trade, issuance, disposal or use of cryptocurrency as an offense that merited a fine ranging from ₹1 lakh to ₹50 crore, and imprisonment of up to 10 years.

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