The watchdog responsible for enforcing economic laws and fighting financial crime is probing one of India\u2019s largest digital currency exchanges over alleged violations of the country\u2019s foreign exchange law. The Enforcement Directorate (ED) is going after WazirX after it allegedly allowed users to transact digital currencies without proper documentation, even as a dozen other global regulators go after its owner Binance for continued legal violations.<\/p>\n
In its recent notice to WazirX, the watchdog has reportedly asked the exchange to explain why \u201cwithdrawal from crypto wallets is not a violation of the Foreign Exchange Management Act (FEMA),\u201d a source with knowledge on the matter told Indian business newspaper Economic Times.<\/p>\n
According to the paper, the regulator has further asked WazirX to explain digital currency transactions totaling INR2,790 crore ($258.3 million) which it believes may have violated the country\u2019s financial laws.<\/p>\n
An official for the ED stated, \u201cThese were carried out in violation of forex rules. WazirX\u2019s platform allowed clients to transfer cryptocurrencies without proper documentation, making it a route for laundering.\u201d<\/p>\n
The watchdog is concerned about the flow of funds through WazirX since it crosses borders, the official added. \u201cSince money has crossed borders, the law of the land applies and one needs to be sure that this money isn\u2019t cheap money (cheap money is low-interest loan) or dirty money (used for illegal activities),\u201d he stated.<\/p>\n
For the watchdog, which falls under the Ministry of Finance, the inter-jurisdictional funds movement presents a unique challenge. WazirX, like any other exchange in India and around the world, allows users to withdraw their digital currencies to other exchanges and wallets. This, according to the watchdog, means that while they can know the address the digital currencies go to, they mostly don\u2019t know who controls the wallet. This presents a blind spot that criminals can exploit.<\/p>\n
The regulator is adamant that WazirX isn\u2019t doing enough to combat possible misuse of digital currencies by criminals.<\/p>\n
An official at the regulator commented, \u201cThe exchange has claimed they have done KYC, but that isn\u2019t enough to ensure that the digital currency isn\u2019t 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.\u201d<\/p>\n
WazirX CEO and founder Nischal Shetty declined to comment on the regulatory action. And according to sources around the exchange, it has yet to respond to the watchdog.<\/p>\n
For now, the regulator\u2019s attention is on WazirX, but other exchanges are worried that they could be next. One official with another Indian exchange commented, \u201cWhile the present investigation is linked to WazirX, ED\u2019s approach and line of questioning could eventually involve other exchanges. Traders on all exchanges are free to transfer cryptos to other wallets\u2026 However, we have not received queries or asked to share data on outflow-inflow into wallets.\u201d<\/p>\n
The fresh crackdown in India is exposing some of the loopholes in the digital currency market. One of these is the perception by some that digital currencies are beyond the scope and reach of regulators.<\/p>\n
One trader told the newspaper, \u201cA bank or the regulator can find out the details of suspicious accounts. But the essence of cryptos, which aims to bypass the banking system, is anonymity and privacy.\u201d<\/p>\n
However, as has been proven time and time again, Bitcoin isn\u2019t anonymous, nor should it be. Anonymous digital currencies like Monero have continued to be booted out of several exchanges as they present a money-laundering loophole.<\/p>\n
Watch: CoinGeek Zurich panel, The Future of Trading & Digital Assets<\/p>\n