WazirX crisis: Customer frustration mounts as crypto exchange considers next moves

WazirX is collaborating with forensic experts and law enforcement agencies to trace and recover the stolen assets. The platform has announced rewards for anyone aiding in freezing or recovering the funds and has alerted other crypto exchanges to block the involved addresses.

WazirX co-founder Nischal Shetty has said that recovering such a large amount could take a long time. He suggested that the quickest way to reopen the platform is to rebalance crypto portfolios and distribute the losses among all users to the tune of 45 per cent.

However, this approach has left many customers furious and feeling betrayed as it effectively treats 45 per cent of their holdings as collateral damage from the hack. “Who is at fault? WazirX. But who is paying for it? Users,” Paras Babbar, who works in the Web3 space and has been investing in crypto since 2016, told indianexpress.com.

What is the 55/45 approach proposed by WazirX?

As per WazirX’s plan, a user will be able to only trade or withdraw 55 per cent of their crypto assets as the remaining 45 per cent will be converted to USDT-equivalent tokens and locked.

The crypto firm has also launched a poll for registered users who essentially have two options: Option A allows them to trade their unlocked 55 per cent of crypto assets but they will not be able to withdraw their funds. Option B allows users to trade as well as withdraw but these users will lose priority when it comes to recovering and returning the stolen assets – if that happens.

“If your portfolio consists entirely of affected SHIB tokens, we will allocate replacement token/s equivalent to 55 per cent of the value of your SHIB holdings. The value will be calculated based on average prices from CoinMarketCap and select global exchanges as of 21 July 2024, 8:30 PM IST,” WazirX said in a blog post, adding that this approach will not affect users’ INR balance on the platform in any way.

For users with 45-99.9 per cent stolen tokens, WazirX said that the 55 per cent unlocked portion will be made up of a balanced crypto basket i.e. a mix of different crypto coins. For users with zero per cent stolen tokens, they will receive 55 per cent of their tokens back.

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The poll meant for users to pick between Option A and B closes at 7 am on August 3. On July 29, Monday, WazirX clarified that the poll is a preliminary step and its outcome will not be final. “We will also explore options, such as airdrops and any other emerging ideas, as we continue on our path to recovery,” it said.

Why has this approach been met with criticism?

The company justified its plan of socialising losses among users by stating that the approach “balances quick access for some with potential recovery for others.” Though WazirX said it has filed a police complaint on the National Cybercrime Reporting Portal, it said that legal action to recover losses can be a lengthy process with legal fees. Users may not receive compensation until the proceedings are concluded, it added.

But WazirX customers are not convinced, especially since it wasn’t specific users’ funds that were targeted but the exchange’s liquidity on the backend.

“Right now, it has become a habit for me to open and check WazirX every morning,” Sana Afreen, whose crypto assets worth Rs 25 lakh have been withheld on the platform, told indianexpress.com.

“You are giving me a withdrawal management poll where you are telling me that I can take 55 per cent of whatever funds I have but the remaining 45 per cent can vary. So, you’re actually imposing the liability caused by your carelessness on the user. It’s not fair. Why are you just socialising the losses among customers rather than between the customers and the company?” Afreen asked, adding that she is not likely to opt for either of the options on WazirX’s poll.

“I had approximately Rs 1 lakh worth of crypto assets on WazirX. I find both poll options challenging to evaluate, as I’m uncertain how the company might use the funds to their advantage,” another WazirX customer said on the condition of anonymity. Indianexpress.com has reached out to WazirX for comment and this report will be updated if we receive a response.

Afreen, who works for a US-based AI company, fears that her crypto portfolio could incur more losses due to WazirX’s suggestion to commence trading as per CoinMarketCap average prices on July 21 (when trading was halted).

WazirX’s move to lock 45 per cent in USDT-equivalent tokens instead of the original currency has also drawn flak. In a followup FAQ post, the company gave its rationale that “in a bear market, prices tend to be low, while in a bull market, they can be high, causing significant fluctuations in the value of cryptos.”

However, putting it in Web 2.0 terms, Afreen explained, “I have a US dollar but you’re asking me, instead of a US dollar, take this Sri Lankan rupee. The US dollar will fluctuate in a positive way but there are chances that the Sri Lankan rupee won’t see the same growth.”

When asked if the recent issues with WazirX has impacted their investment strategy, one user said, “This incident has significantly diminished my trust in WazirX’s ability to handle cybersecurity issues. Moving forward, I’ll be more cautious in selecting platforms governed by stronger regulations to better protect my investments.”

On the other hand, Afreen appreciated WazirX for being transparent and active in their communications since the alleged hack. She was also more open to getting behind the cryptocurrency firm during this time, adding that it would make more sense if the socialised loss percentage was 15 or 20 per cent.

Is this different from when traditional banks collapse?

“The fact is that such a situation is unprecedented in the Indian legal system. While there are set protocols in place for financial institutions, there are no regulatory systems in place for consumer or user protection in the VASP [Virtual Asset Service Providers] space in India,” said Subha Chugh, a lawyer who specialises in the Web3 industry.

She said that in cases of bank collapses, like the PMC Bank crisis, all customers are bound to a set withdrawal schedule. “The biggest issue here is that because there are no regulatory mandates for institutions like exchanges or custody solution providers, they don’t need to maintain any insurance, separate user funds, maintain reserves, or even ensure a certain percentage of user funds do not leave the jurisdiction,” Chugh opined.

She also questioned why WazirX had stored nearly half of its reserves in one place. “But hindsight is 20/20 and I think this should function as a wake up call for regulators in India to bring VASPs under existing regulations and formalise user protection regulations like South Korea’s Virtual Asset User Protection Act,” she added.

When asked if WazirX customers in India have any legal recourse, Chugh said, “I believe users who can prove that 100% of their funds belong to the “not-stolen” category would definitely have locus standi here.” “But redistribution of assets in a situation like this is always tricky. There is always a chance that a liquidator or a court appointed financier decides that this is the best economical strategy after all,” she added.