A search by the Enforcement Directorate [ED] on Zanmai Labs - the operating entity of cryptocurrency exchange WazirX - under money laundering provisions has soured relations between the exchange and its larger peer Binance, with whom it had announced a partnership and an acquisition deal in 2019.
The search also corresponded to the ED freezing Zanmai's bank account with ₹64.67 crore in it.
In the latest development in the saga on August 8, Binance announced that it would not support off-chain fund transfers between the exchanges. Off-chain transfers are not facilitated by the blockchain, the technology that backs cryptocurrencies, but rather by the parties themselves. Off-chain transfers of funds save on costs (no matter how minimal) of transferring cryptocurrencies.
However, regular transfer of funds trading between them would still be active.
Binance is among the world's largest crypto exchanges based in the Cayman Islands. Further, Binance said it would be supporting the Indian authorities moving forward.
On August 5, the ED's search of Zanmai Labs was also the latest development confirming to a larger theme of crypto exchanges like WazirX, CoinCDX and CoinSwitch Kuber coming under increased legal scrutiny due to allegations ranging from money laundering to tax evasion.
The spat between the two started playing out even between their founders on social media since the raid took place and over Binance's exact involvement with Zanmai Labs and WazirX.
Here are five things to know about the tussle between WazirX and Binance.
1. Why did the search take place?
The ED has said that the Chinese non-banking financial companies [NBFCs], who could not get licenses in India, are piggybacking on defunct apps to do business. Such apps have then diverted money abroad using cryptocurrencies once investigations began.
WazirX has come under the scanner as it partnered with Binance, Crowdfire Inc. (based in the United States) and Zettei (Singapore) to obscure ownership of the exchange. The ED also said that the exchange had shoddy work practices (like most employees working from home), their office was a two-chair co-working space.
WazirX had been given ample opportunity to explain itself and share the require information, but failed to comply, according to the ED.
The ED's version of the story can be read here.
2. Does Binance own WazirX?
In 2019, Binance announced that it would be acquiring WazirX in a press release titled, "Binance Acquires India's Leading Digital Asset Platform WazirX to Launch Multiple Fiat-to-Crypto Gateways" when the cryptocurrency ecosystem in India was still coming out of the shadows. It can be read here.
This announcement gave Binance a foothold in India and allowed customers to buy and sell cryptocurrencies through fiat (traditional currency) with WazirX integrating a payments gateway for the same.
"Global cryptocurrency exchange and blockchain ecosystem, Binance, today announced its acquisition of WazirX, India's most trusted bitcoin exchange", it said in 2019.
In 2020, cross-purchasing across the exchanges, off-chain transactions and crypto purchases in crypto were also facilitated.
However, in a bizarre update to the 2019 press release on August 5 this year, Binance has clarified that the acquisition meant only an "agreement to purchase certain assets and intellectual property of WazirX" and did not include any transfer of equity (or shareholding) in Zanmai Labs.
4. War of words
This ambiguity over ownership led to Binance's CEO Changeng Zhao and Nischal Shetty of Zanmai Labs engage in a war of words on Twitter over how much influence Binance had over WazirX and Zanmai.
Shetty claimed that Zanmai is not to be confused with WazirX. Binance owns the WazirX domain, crypto assets and all crypto profits and that WazirX was acquired by Binance. Zanmai though is still owned by Shetty.
Zhang retorted that Binance was never given control over WazirX's signups, know-your-customer (KYC), trading and withdrawals, despite having control over the domain, adding that the deal was never completely closed. WazirX had not given control over these arenas to Binance despite them asking for it as recently as February this year.
4. Whose funds is it anyway?
One question worrying investors is about how to transfer coins from WazirX to Binance. Zhang has urged the users to link Binance and WazirX by transferring funds to Binance and operate their accounts.
But in a lengthy explanation indirectly taking potshots at Binance, WazirX has advised users against transferring their funds to "international exchanges" as they may be unknowingly non-compliant with India law. WazirX argues that they have TDS (tax-deducted-at-source) provisions in place, which international exchanges do not.
5. Are customer transactions affected?
Transactions are still on, according to WazirX.
On the day of the ED search, WazirX said that their withdrawals and transactions are still active.
On August 7, it further assured that its operations were continuing as usual.
