Industry experts emphasize the urgent need for regulatory frameworks to protect investors in the crypto market
About 4.2 million of WazirXโs 16 million users were struck by a massive hack of the cryptocurrency exchange on 18 July that wiped off 40-50% of their crypto balances. Most of those affected users were Indians. But in the month and half since the $230-million hack there has not been any legal or regulatory action in India against the exchange or its owners.
India has taken the route of taxing cryptocurrency without actually regulating it or creating any safeguards for consumers. It has also laid bare the complex holding structures and interlinkages of crypto exchanges in India.
WazirX has offered a $23 million bounty to help it recover the digital assets stolen from one of its wallets. But it has approached the High Court of Singapore, where its parent company Zetai Pte is located, seeking a moratorium on all legal claims against it while it comes up with a restructuring plan.
CoinSwitch, another Indian crypto exchange, has approached Singapore courts to recover its own cyrpto balances that were held in WazirX. Most other victims of the WazirX hack wouldnโt have that luxury.
โI had invested approximately โน1.4 lakh in WazirX around 3-4 years ago, which grew to โน2 lakh over timeโฆ I think about half my money will come backโwhether in 1 year or 10 years I donโt know,” said Ravi Handa, a Jaipur-based investor.
WazirX declined to comment for this report.
Criminal litigation an option for users
WazirX, which held about $570 million in customer balances before the hackers struck, cancelled trades done after 18 July and stopped withdrawals. It thereafter allowed withdrawal of two-thirds of the cash balances held with the exchange in a phased manner. It decided to retain the remaining one-third of the balances to meet legal requirements.
This amount may relate to past seizures by enforcement agencies of cryptocurrency held in trust in WazirX or to regulatory action against the exchange itself. In 2022, the Enforcement Directorate had served a notice under the Foreign Exchange Management Act to WazirX for allowing outward remittance of โน2,790 crore to unknown wallets.
Nitin Sethi, who has been using WazirX for more than six years, shared his concerns about the platformโs governance and security issues. โIt is strange that you hold so much money in one single wallet which got hacked,” he said, adding that WazirXโs centralised approach instead of maintaining multiple wallets to distribute risk has put millions of usersโ funds at risk.
WazirX has stated that its safeguards require 5-6 signatories, including a custodian, for its wallets.
WazirX’s Singapore headquarters has also left many users feeling abandoned by both the platform and local regulatory bodies such as India’s Financial Intelligence Unit (FIU), which is yet to issue any clear statements or actions in response to the hacking.
โIndian customers have the option to pursue criminal litigation against WazirX in India, which could potentially assist in the recovery of funds and holding the responsible parties accountable. Criminal proceedings can be more effective in compelling action and securing restitution, especially in cases involving such kind of potential fraud or misconduct,” said Sumit Agrawal, founder, Regstreet Law Advisors, and a former officer with the Securities and Exchange Board of India.
โHowever, investors must also consider the evolving nature of law and regulation in Indiaโs cryptocurrency sector. Without a comprehensive and established regulatory framework, investors are currently operating at their own risk,” he added
Nikhil Kumar, a co-founder of a startup in Bengaluru, shared his frustrations on not being able to sell his cryptocurrency holdings in WazirX due to the platform’s decision to halt trading following the 18 July attack.
“I need some money to withdraw from the profits as I do not know how the markets would change because anyway it is volatile market”, he said.
Kumar had invested in cryptocurrencies in 2021 with the intention of using the savings as part of his long term investment strategy. He is stuck now and unable to liquidate his crypto assets when he needs them the most.
Kumar said that unlike banks and financial institutions that take responsibility when something goes wrong, WazirX has left users to bear the losses. “WazirX should take some responsibility and not let the users suffer”.
Ajeet Khurana, founder of Reflexical Pte Ltd, a Singapore-based advisory for startups in the Web3 space, said WazirX’s decision to use “customer funds for legal expenses is unprecedented”. There needs to be a lot more disclosure about how much money is being held in which entity – Indian or Singaporean. While the moratorium applicant in Singapore has revealed a lot of information, there should be similar transparency about the Indian entity,” he said. “WazirX should consider making significant repatriation to make up for the customer’s loss from its own treasury, and from sale of its equity and other assets”.
For the long term, though, Agrawal of Regstreet Law Advisors said Sebi and Reserve Bank of India need to step in and regulate the cryptocurrency market to prevent such incidents.
“Until such regulations are in place, the risks associated with digital assets will remain high, making it imperative for investors to be cautious and well informed.”