Troubles mount for Indian crypto exchanges as ED turns on the heat

Coinswitch, one of India’s largest crypto exchanges, joined the list of beleaguered entities whose premises were searched by the agencies and tax officials earlier this week.
ETtech reported on August 26 that ED searched five locations of Coinswitch.

Ashish Singhal took to Twitter – for the first time after the
searches at Coinswitch Kuber in connection with its money laundering probe into the instant micro loan app scam this week – to allay the fears of investors and the crypto community alike.

“Enforcement Directorate – Bengaluru – has been engaged with us with respect to the functioning of our crypto platforms/exchanges. We are fully cooperating with them,”
he tweeted.

“Our engagement with the Enforcement Directorate – Bengaluru was NOT related to any money laundering inquiry under PMLA, as reported in some news articles,” he
further clarified.

Discover the stories of your interest

Singhal said crypto is a new asset class and is not yet clearly classified in most parts of the world.

Explaining the Indian scenario,
he said, “Now, the law (in India and elsewhere) is still assessing if crypto is a “commodity”, “security”, “currency” or something new. This is a work in progress.”

Valued at $1.9 billion, Coinswitch claims to have more than 18 million registered users and is backed by the likes of Andreessen Horowitz, Tiger Global, and Coinbase Ventures.

Coinswitch is the third exchange after WazirX and Flipvolt (the Indian arm of crypto exchange Vauld) to have come under the scanner of the central agency, which is investigating at least ten cryptocurrency exchanges for allegedly laundering more than Rs 1,000 crore.

ET had reported that
the money has been identified as proceeds of crime of the accused firms under investigation in the instant loan app case and most of them have a China link.

The probe has unearthed instances of the accused firms approaching the exchanges to buy crypto coins for more than Rs 100 crore and crypto coins being sent to international wallets> Further,
sources had told ET these exchanges did not conduct any enhanced due diligence and even failed to raise suspicious transaction reports (STRs).

On further investigation in the money laundering probe,
ED allegedly found over Rs 800 crore proceeds of crime against 365 fintechs and their non-banking financial companies (NBFCs) partners.

The modus operandi, according to ED, was simple: Loans worth over Rs 4,000 crore were disbursed by these fintech firms, which then sought to recover the amounts lent through telecallers. The companies mostly used defunct NBFCs, which allegedly lent their RBI-issued licence for a share of profit ranging from 0.5% to 1%.

The WazirX case

Earlier, the central agency
raided the premises of one of the directors of Zanmai Labs – the parent organisation of WazirX – and issued a freezing order to freeze their bank balances to the tune of Rs. 64.67 crores.

According to the agency, the exchange ‘actively’ assisted around 16 fintech companies under investigation on charges of money laundering to divert their alleged proceeds of crime using the crypto route. The agency probe has found that the exchange has a complicated ownership structure making it ‘obscure’.

Interestingly, the probe found that most of the transactions on the exchange were not recorded on the blockchain – a prerequisite for the operation of any cryptocurrency.

What followed the raid and freezing of WazirX’s assets was a
social media slugfest between Nischal Shetty – one of the cofounders of WazirX – and CJ – the founder of Binance – over the ownership of WazirX.

Both wanted to pass the buck to the other as investigations intensified and engaged in blows on Twitter

“After some media reports on Binance structure, we asked about it,” Shetty wrote in a tweet thread. “We were given an ambiguous answer: the parent entity is under restructuring. It’s been many months, still waiting for the Binance Parent entity… Can Binance name Parent entity?”

“The WazirX founding team maintained control of the operations of the platform,” Zhao
wrote. “We (Binance) were never given data or control of users, KYC, etc. We would love to work with ED to fix these issues in WazirX.”