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Binance-WazirX spat: Opaque ownership, a hazy acquisition deal, and off-chain transactions

The ED’s investigation into forex rule violations has only led to more unanswered questions about the two cryptocurrency exchanges in an unregulated space

August 09, 2022 / 12:15 PM IST
WazirX app (Image: Shutterstock)

WazirX app (Image: Shutterstock)

“We always thought that Binance owned WazirX. Binance even sent all of us WazirX employees Apple watches last year during their anniversary around July,” said a former WazirX employee requesting anonymity.

The employee said WazirX didn’t allot employee stock options to its staff, while other Indian exchanges offered lucrative ESOPs to new recruits.

“We raised this issue many times about ESOPs, since it’s a volatile sector. But we were always told that it’s Binance-owned, so no question of ESOPs,” the employee said.

An investigation by India’s Directorate of Enforcement (ED) into predatory and fake Chinese loan apps inadvertently opened a can of worms in the already beleaguered crypto space.

A war of words suddenly erupted over the weekend, raising questions about the ownership of WazirX, the crypto exchange with the largest trading volumes in India.

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After announcing that Binance had acquired WazirX in November 2019, Binance CEO Changpeng Zhao, also known as CZ, tweeted that the world’s largest cryptocurrency exchange by trading volumes “never—at any point—owned any shares of Zanmai Labs, the entity operating WazirX.”

His series of tweets started a few hours after the ED released a statement on August 5 that said Zanmai Labs, the company owning WazirX, created a web of agreements with Crowdfire Inc., Binance (Cayman Islands), and Zettai to “obscure the ownership of the crypto exchange.”

Structure and ownership

WazirX was founded in 2018 by Nischal Shetty, Siddharth Menon and Sameer Mhatre.

Over the past one year, the crypto exchange has expanded its team size to 250 as its revenue grew to Rs 105 crore in FY21 from Rs 26 lakh a year earlier, according to the latest regulatory filings accessed via Tofler.

Shetty and Mhatre are listed as directors of Zanmai Labs in regulatory filings. Zanmai Labs is owned by Zettai, a Singapore-registered entity, which holds a 99.99 percent stake in the company, while Shetty owns 0.01 percent.

The three cofounders hold a stake in Zettai – Shetty being the largest shareholder with a stake of 74.3 percent. Mhatre and Menon hold 18.6 percent and 7.2 percent, respectively.

The payslips issued to the exchange’s employees, however, did not mention WazirX, Binance or any of these entities. The payslips mentioned Qizil21 Softwares, according to the former employee. As per available data, the directors of Qizil21 Softwares are Shetty, Mhatre and Shetty’s wife Moujhuri Guha. Shetty and Guha are the shareholders of the company with 60 and 40 percent stake respectively, as per regulatory filings.

Founders step away

The other aspect of this case involving WazirX is about two cofounders shifting out of India. Some employees told Moneycontrol that they were never informed about Shetty and Menon moving base to Dubai.

“Things started changing as their involvement in day-to-day affairs reduced from around October 2021. Sameer was the only one involved with the teams,” an employee said. “This is not the case with other exchanges and founders.”

Moneycontrol was the first to report on February 16 that the two cofounders had stepped away from active operations. Shetty founded decentralised blockchain platform Shardeum in February. The Layer-1 Web3 firm revealed to its community that it is in the final stage of raising $18.28 million in a seed round.

Menon is working on his new startup, Tegro, which is a marketplace for Web3 game assets.

How the spat unravelled 

The ED, in its statement, said Shetty first told the investigation agency that WazirX controls all crypto-crypto and rupee-crypto transactions and only has an IP and preferential agreement with Binance.

“But now, Zanmai claims that they are involved in only INR-crypto transactions, and all the other transactions are done by Binance on WazirX. They are giving contradictory and ambiguous answers to evade oversight by Indian regulatory agencies,” the ED said.

“The whole industry is stumped. Everyone was well under the impression that Binance owns WazirX. Now, the question is which government has the wherewithal to seek data,” said an industry executive who did not wish to be identified. “Now it gets challenging for WazirX because all this while their response was that for data you need to go to Binance. But now with Binance saying it is not involved, then their claims are under question.”

Deal in question

Many questions are being asked about the WazirX-Binance acquisition:

Who has the user transaction data?

Why did CZ tweet now after ED released a statement against WazirX?

Why did Shetty move to Dubai around the time the ED started its investigation?

“The investigation started a year back. Why did CZ tweet now?” asked a former employee of WazirX.

WazirX’s troubles started in June last year, when the ED tweeted that it issued a show-cause notice to the exchange for “contravention of FEMA, 1999 for transactions involving cryptocurrencies worth Rs. 2790.74 crore.”

According to the government, the notice was issued to WazirX for allowing outward remittance of crypto assets to unknown wallets. According to minister of state for finance Pankaj Chaudhary, all crypto transactions between WazirX and Binance were not being recorded on blockchains.

Transaction data

“The biggest challenge was off-chain transfers. In case you have crypto withdrawals on the blockchain, the transaction would be traceable and the government need not ask Shetty or CZ about these transactions. But in case of off-chain transfers, there is complete obfuscation because the information is under their control,” the executive explained.

A few WazirX employees confirmed the exchange did not have any further information to share because the rest of the data needed access from Binance.

“The attempt from both sides is to keep the entity that ED is trying to get data from outside the jurisdiction of the investigative agency,” said a lawyer who did not wish to be identified. “If Binance says WazirX is operating on its own and WazirX says the data is with Binance, they are just trying to dodge the long arm of the law.”

However, WazirX has been saying that it is fully cooperating with the ED for several days and have responded to all their queries fully and transparently.

What makes the matter more complicated is the absence of a dedicated regulator for crypto exchanges, despite a long, ongoing discussion.

On August 8, Binance said it is removing the off-chain fund transfer channel between WazirX and Binance. Also, Binance will support Indian regulators in matters concerning WazirX.

Future of WRX coin

Another important matter is the future of the WazirX coin (WRX). Binance had done the initial exchange offering and sold WRX tokens on its platform after the 2019 deal with WazirX. Shetty continues to claim that Binance controls the distribution of WRX, which means it can even delist the coin at any time.

“As for listing or delisting, we don’t comment on any specific token or coin,” a Binance spokesperson said. “At Binance, we periodically review each digital asset we list to ensure that it continues to meet the high level of standard we expect.”

WRX was one of the top-traded coins on WazirX last year, when the exchange traded volumes of over $43 billion. It also said the exchange crossed over 10 million users last year.

More questions 

On the outside, the WazirX-Binance deal looked simple. Binance acquired WazirX and now owns the company. But Binance does not own any stake in either Zanmai Labs or Zettai.

According to a tweet by Shetty, the deal included the sale of WazirX’s technology to Binance.

“When we initially sought out a local partner in India, we were still in our infancy as a company. India is a unique market. There’s so much diversity in consumer behaviour across the length and breadth. Taking learnings from other global tech players who entered India, we wanted to look for a strong local partner to help us understand the nuances better,” a Binance spokesperson said in a response to Moneycontrol's queries.

The spokesperson added: “However, we encountered issues with Zanmai Labs. We have tried to work with them to find a resolution for some time. The recent news about the ED investigations and notices on Zanmai are also material developments. We felt the need to clarify this in the interests of user protection. Zanmai-run WazirX is still one of the largest crypto exchanges of India, with a lot of users using it to access the world of crypto.”

Another lawyer told Moneycontrol on condition of anonymity, “While the term acquisition is used colloquially, acquisition can be either of a company or of assets of the company. Based on the terms of use, different parts of WazirX are operated by Binance.”

Shetty further revealed that Binance’s team wanted to seek control of Zanmai Labs in February.

In an interview to CNBC-TV18, Binance’s chief communications officer Patrick Hillman said WazirX was dragging its feet when the time came to pass on the assets.

“Shetty told us, ‘We have given you access to our AWS pass keys,’ but that’s not what we meant by ownership. The operations, marketing, how users are KYCed, actual database of the users were all kept, owned and run by WazirX. It’s like they sold us a car, handed us the title and then kept the keys with them,” Hillman said.

“They have been driving the car for the last two years. Now, the ED has asked them for information on what they used the car for and now they are throwing up their hands, saying Binance owns the title,” he said.

Binance also asked Indian users to move their assets officially to Binance.com, even as the WazirX saga plays out.

In February, Moneycontrol reported that Binance was looking at setting up a management team to oversee operations in India. As per its recent statements, Binance seems to be on path to begin its own independent operations in India.
Sanghamitra Kar
Priyanka Iyer
first published: Aug 9, 2022 12:15 pm
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