Indian regulator probes crypto exchange for alleged forex law violations

Published at: July 19, 2021

Mumbai-based crypto exchange WazirX has been the target of much of India’s regulatory heat as the company continues to attract local investors.

In the latest run-in with the government, the Directorate of Enforcement (ED) issued a show-cause notice to WazirX for allegedly violating the Foreign Exchange Management Act in relation to transactions worth 2,790.74 crore rupees (~$372 million).

As per The Economic Times, the Binance-owned cryptocurrency exchange came into the spotlight after the ED questioned its capability to allow users to make cross-border payments without direct oversight of the government. An official from the ED highlighted:

“These were carried out in violation of forex rules. WazirX’s platform allowed clients to transfer cryptocurrencies without proper documentation, making it a route for laundering.”

Sighting a violation of the law of the land, the notice issued to WazirX is based on claims that “one needs to be sure that this money isn’t cheap money (cheap money is low-interest loan) or dirty money (used for illegal activities).”

While WazirX's decentralized capabilities allow users to transfer cryptocurrencies across international borders, WazirX users from India are mandated to share Know Your Customer (KYC) documentation like PAN and Aadhaar cards, an equivalent to the United States Social Security system. However, the crypto exchange will not be able to track the identity of the receiver's wallet.

As known by crypto enthusiasts across the world, connecting an individual to a recipient’s wallet address is nearly impossible without proper KYC processes. The ED official also stated that “the exchange has claimed they have done KYC, but that isn’t enough to ensure that the digital currency isn’t misused. In the absence of any official digital currency and regulation, there have been instances of Bitcoins being used to buy drugs on the dark net as well as for money laundering.”

Citing the existing KYC and Anti-Money Laundering processes in place, WazirX told Cointelegraph:

“We are able to trace all users on our platform with official identity information. We have cooperated with ED in the investigation so far and are preparing a response to the detailed notice we've received on FEMA violations.”

According to the exchange's spokesperson, WazirX intends to follow through with ED’s notice, stating “this is where regulatory clarity will help us a lot.”

Fueling the ongoing witch hunt against India’s crypto establishment, the Delhi High Court recently issued notice to leading crypto exchanges including CoinDCX and WazirX on revisiting their advertisement policies.

The court seeks to impose fresh guidelines for crypto ads with a disclaimer that covers 80% of the screen. The petition further wants crypto firms to include a voiceover highlighting the risks associated with crypto investments.

Indian authorities continue to scrutinize homegrown crypto innovations, while not clarifying their official stance on the technology. Previously, India’s traditional banking giant, ICICI Bank, had also issued a warning to its remittance users to not use the platform for crypto transfers nor invest any fiat currency that may have affiliations to crypto investments in the past.