WazirX: Cryptocurrency’s legal entanglements seem as puzzling as the digital asset itself

Traders betting on the troubled cryptocurrency platform WazirX have learned that they are “unsecured creditors” of a Singapore company called Zettai (the Japanese word for ‘no matter what’); that some of the “creditors” or users of large amounts of Wazir X are committed to protecting their privacy; and, the complex relationship under any usual regulation on investment schemes. Why? Because unlike a finance company, they weren’t exactly ‘pooling’ funds, but simply taking your money to buy the cryptocurrencies you preferred.

A complex relationship

In fact, for unwitting users of WazirX The July 2024 cyber theft and the chain of events are a crash course in cryptocurrency regulation — or rather, the lack thereof. They spent the weekend deciphering the affidavit filed by WazirX founder Nischal Shetty with Singapore’s High Court to support Zettai’s request for a moratorium under the Restructuring and Insolvency Act.

Zettai is the parent company of the Indian company Zenmai (also a Japanese word meaning ‘main spring’) that operates WazirX. Zettai’s other director is Paripooranam, a Singapore resident and daughter of one V Chettiar. In November 2019 Binance announced the acquisition of WazirX. The affidavit does not share details for confidentiality reasons.

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Following the agreement, WazirX tokens and wallets were handed over to Binance. But, the relationship between the partners started to deteriorate from mid-2022 onwards and Zettai was subsequently “forced to agree (albeit under protest) to the transfer of the cryptocurrency tokens held by Binance.” Therefore, once the partners fell out, the cryptocurrencies were transferred back to Zettai.

In early 2023, Zettai reached an agreement with Answer Eleven (Liminal), a digital asset portfolio management service provider. Now, following the cyber invasion, WazirX users are trying to decide whether to blame the platform or Liminal amid a flurry of statements, counter-statements, court proceedings, and social media disputes.

Users don’t know how long this would take or how much cryptocurrency could be redeemed. Some are wondering if Binance could be dragged into this. “Zettai maintains that the platform and its assets were effectively transferred to Binance in accordance with the transfer transaction, and should have remained with Binance,” the filing said. “Zettai maintains that Binance unfairly relinquished control of the digital assets…”

Read also | WazirX faces criticism for its handling of $230 million cryptocurrency theft

Heavy users

There are over 4.3 million individual users and 640 corporate users of WazirX with balances of $558.6 million and $11.3 million respectively. Listing the top 20 unsecured creditors, the names of the top 6 (who together had a balance of over $10 million as of July 18, the date of the cyber invasion) are not mentioned in the affidavit. The details of two parties (A and B) are “subject to confirmation”, while parties C, D, E and F have requested that they “not be identified in this affidavit as at least one creditor cites potential security risks.”

Some of the top users named in the affidavit are Vishal Moral (balance of $1.46 million), Rakesh Agrawal ($1 million), Neeraj K Burman ($559,082), Punit Dilipkumar Mehta ($527,847), Rajesh Lachmandas Kaura ($521,865), Mallaiah Malikarjunaiah and Harish Paruchuru, among others.

“Although crypto tokens were judicially confirmed as legal, they remained unregulated and unclassified as an asset class. Even under FEMA provisions, it remains unclear whether Crypto tokens (except fiat tokens) may be considered “securities” or any other asset class in which currency investment is permitted. fiscal outlookIt will be interesting to see how this plays out for users of the platform.

Under section 115BBH, any income arising from the transfer of virtual goods digital assets “Wallet theft is a taxable event. Therefore, theft of users’ wallets would ideally result in the extinction of their rights over the tokens. If so, the transfer event was triggered when the coins were lost. Any rebalancing of tokens would mean a new transaction for the users,” said Siddharth Banwat, partner at CA S Banwat & Associates.

Any white knights?

The affidavit claims that a “white knight” is being sought and some have expressed interest in offering “rescue funding”. Zettai has requested a six-month moratorium from the court, a move that Shetty said would ease the concerns of “potential white knights”. The platform has been served with four legal notices.

The affidavit says the restructuring could involve a “sorting of users’ token balances and a possible rebalancing of the available token assets to match the pro-rata token denomination of the balances.” “What this could mean is that let’s say you were holding ABC coin worth Rs 5 lakh, but ABC was not stolen during the cyber theft. But after the rebalancing you could get a mix of a different mix of tokens that would be worth less than Rs 5 lakh, depending on the pro-rata denomination of the balances.” distribution from the recovered token pool,” an industry source said.

In addition to any liabilities Zettai may have to users of the platform, Zettai has approximately $247,000 in accounts payable to approximately 13 creditors.