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The Enforcement Directorate (ED) clamped down on India’s biggest cryptocurrency exchange WazirX for the violation of Foreign Exchange Management Act (FEMA) and its rules. ED’s show-cause notice to the directors of WazirX, Nischal Shetty and Sameer Mhatre, claims particular contravention of Sec 3(a) of Foreign Exchange Management Act, 1999 (dealing in foreign exchange by an unauthorized person) to the tune of INR 2,790.74 crore (USD 382 million).

It claimed that Chinese nationals illegally laundered money worth INR 57 crore by converting them to cryptocurrency and transferring to the Binance Wallet, a Cayman Islands domiciled cryptocurrency exchange that owns WazirX.

ED’s independent investigation of various illegal Chinese betting and dating apps across India has revealed Chinese nationals dealing in illegal online betting worth INR 1,300 crore. A similar chain of conversion was being followed for these proceeds being converted from INR to cryptocurrency and being transferred to Binance.

Currently, FEMA regulations, do not characterise cryptocurrency as “currency” per se.
According to Section 2(h) of FEMA Act,1999, currency notes include only cash in forms of coins and banknotes and it needs to be notified by Reserve Bank India (RBI) to fall under ‘any such other instruments’.
So, this leaves some concerns around the position ED is holding in sending out these notices.

ED has alleged a lack of transparency in the WazirX transactions categorizing them as illegal. Also, as they are stored on the blockchain they are unavailable for audits. In not collecting requisite documents from users, WazirX has violated the Prevention of Money Laundering Act, (PMLA) and FEMA guidelines. ED believes, since WazirX users can transfer virtual currencies to any person across the world irrespective of geographical boundaries and nationality without documentation, it is a safe haven for illegitimate currency exchange. However, the “currency” part of the allegation remains in a haze as far as Indian laws are concerned.

While the news is rife with these allegations, WazirX has gone ahead and stated that it has not received any official show-cause notice from ED and that it has always followed all legal obligations applicable to transactions. It is hard to fully discount this statement; arguably, the charging grounds are opaque and layered.

Circular in May 2021 issued by the RBI cites legal provisions under PMLA, indicating the route the regulator might take if players get ballsy on cryptocurrency/ virtual currency while allowed only INR as recognized currency. ED’s probe indicates that if India were to fast track framing of cryptocurrency laws, it would remain stringent, cautious and authoritative in its approach.

Not in abeyance, Cryptocurrency and Regulation of Official Digital Currency Bill, 2021.

For further insight into the domestic cryptocurrency sector read: Cryptocurrency – Has the regulator softened its gaze?

CryptoBlock is for information purposes. Nothing contained herein is, purports to be, or is intended as legal advice and you should seek legal advice before you act on any information or view expressed herein.
Endeavoured to accurately reflect the subject matter of this alert, without any representation or warranty, express or implied, in any manner whatsoever in connection with the contents of this. This isn’t an attempt to solicit business in any manner. India does not have laws regulating cryptocurrencies, yet.
Source Credit- MoneyControl, BlockCrypto, Lexology

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