In today's Finshots we see why two founders are feuding on Twitter trying to wash their hands off of WazirX

The Story

Act 1: Blood Money

In December 2020, the Hyderabad police launched an investigation into three suicides linked to harassment from recovery agents. In each case, they found the same telltale signs that led the victims to their untimely demise.

  1. The victims came from impoverished backgrounds.
  2. They were dealing with a major cash crunch
  3. They installed a loan app online that promised to disburse micro loans (anywhere between ₹2,000 to ₹20,000)
  4. They were asked to pay an exorbitant interest rate with a short repayment cycle (typically less than 60 days)
  5. And when they couldn’t come good on their payment, the loan recovery agents harassed them by contacting their family, friends and relatives.
  6. This inevitably tipped them over the edge and the victims ended their lives

During the investigation, the Hyderabad police found 75 bank accounts holding ₹423 crores linked to 30 online loan apps.

Act 2: Operating from the shadows

On August 4th 2022, the Enforcement Directorate (ED) attached (froze) assets worth ₹105 crores belonging to 12 non-banking financial companies (NBFCs).

And their story is equally intriguing.

Most of these NBFCs went bust a long while back. But then they found an unlikely saviour — online lending companies operating out of China. The NBFCs needed a new source of revenue and the online lending companies needed an NBFC partner to extend credit to Indian customers. It was a mutually beneficial alliance.

With a licensed partner in hand, these online loan companies set up an intricate web of shell companies replete with dummy directors to disburse loans worth thousands of crores. Some NBFC partners even shared their netbanking ID and passwords with these companies so that they could control loan disbursals and recovery end-to-end.

With the deal in place, the online loan companies began promoting the loan apps on Google Play Store and other social media apps. They promised instant disbursals, limited verification checks and zero paperwork.

However, when the predatory tactics came to light, customer complaints began to rack up very quickly. Google for its part began purging apps that didn’t comply with its policies. But every time one app went away, ten others took its place. Progress was slow.

Act 3: The Crackdown Begins

The RBI released bulletins urging customers to stay away from these fake loan apps. But that approach had limited success. After all, the demand was there. The supply — ever ready. And Chinese operators could spin off a new app almost overnight.

They had to do something different. So they started going after the NBFCs. They began cancelling the registration certificates of NBFCs found to be involved in this nefarious practice. And while it did put a massive dent in the illicit operation, it didn’t bring the perpetrators to justice.

It also did precious little to recover the proceeds of crime.

So the Enforcement Directorate began going after the people that facilitated the movement of funds. Which brings us to WazirX.

Act 4: The WazirX Connection

WazirX is one of India’s most popular cryptocurrency exchanges. It was founded in 2017 with an explicit aim to help people trade in cryptocurrencies. In 2019, Binance acquired the company for an undisclosed fee. Binance is a global cryptocurrency behemoth and the acquisition was seen as validation of India’s crypto ambitions.

But then, just 4 days ago, in a remarkable turn of events, Binance founder Changpeng Zhao denied acquiring the company. He even asked users to transfer their funds from WazirX to Binance. WazirX founder Nischal Shetty immediately shot back. He said and we quote — “WazirX was acquired by Binance. Zanmai Labs is an India entity owned by me & my co-founders. Zanmai Labs has license from Binance to operate INR-Crypto pairs in WazirX. Binance operates crypto to crypto pairs, processes crypto withdrawal…”

Essentially he’s saying — We (Zanmai Labs) convert the money from INR to crypto and Binance takes care of all transactions when users exchange one cryptocurrency for another. He also noted that the Binance had root (full) access to WazirX servers and that they held all crypto assets including the profits generated on cryptocurrency transactions.

Zhao was in no mood to relent. He contested Shetty’s claims by arguing that Binance held no equity in Zanmai Labs. And that the founders had refused to transfer full control to Binance despite repeated requests.

In essence, both people are washing their hands off WazirX and it remains to be seen who actually owns the company.

But you have to ask — Why? Why would these people want to wash their hands off a money spinner like WazirX?

Well, this brings us back to the ED investigations. On August 5th, the Enforcement Directorate froze bank assets belonging to WazirX. The company is now under investigation for laundering money and the ED has accused the directors of flouting KYC norms while signing up users.

See, when companies like WazirX facilitate the movement of funds (from the bank account to the cryptocurrency exchange for instance), they’re expected to know every single detail about their customer. That’s why it’s called “Know-your-customer norms (KYC norms).” But some companies do away with the stringent requirements if they believe they can stand to make some money in the process. They’ll be lax about it — not so stringent, so to speak. And the Enforcement Directorate argues that WazirX has been unwilling to share details of transactions that have transpired on the exchange. They go as far as saying that WazirX may not even have some of this information.

But ED doesn’t want every last detail. They want to know about very specific transactions. In particular, the transactions involving online loan companies we spoke of earlier. And they have a very strong case for seeking it. See, they believe loan companies used cryptocurrency exchanges to move funds in and out of India. They believe these entities got away with it because firms like WazirX didn’t fully “Know their customers.” Without their help, they’d have shut shop long ago. Or at least trod carefully. But since cryptocurrency firms didn’t even record the details of bank accounts related to some of these entities, the Chinese loan companies could get away with the most brazen violations.

If WazirX is found guilty, they'll have blood on their hands.

And the Enforcement Directorate is hot on their heels.

As the ED note reads — “By encouraging obscurity and having lax AML norms, it has actively assisted around 16 accused fintech companies in laundering the proceeds of crime using the crypto route.”

So if you’re wondering why Nischal Shetty and Changpeng Zhao are feuding on Twitter washing their hands off of the business, well, this is it. Nobody wants to be held accountable for the company’s transgressions and neither party wants the bad rep that comes with it.

Also, this was an interesting story, I am sure. But you know what else is interesting? Ditto - our very own insurance advisory platform. Unlike unregulated entities we quoted in the story earlier, Ditto is a corporate agent regulated by IRDAI. And there's no Chinese connection here :P. So if you are looking to buy insurance or you know somebody who's willing to go down this route, don't forget to check out Ditto. You'll love the service. Until then...

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