What ED Notice at WazirX Means for Crypto Traders
The Enforcement Directorate (ED) announced on Friday that it had sent a notice to the cryptocurrency exchange WazirX for violating the Foreign Exchange Management Act (Fema) of 1999 for transactions ₹2,790.74 crore. Mint explains what this means for investors.
What is the ED case notice about?
ED suspects Chinese fraudulent investment app operators used WazirX to transfer ₹57 crore abroad. The operators have reportedly converted rupees to USD-Tether (USD-T), a dollar pegged crypto, and transferred it to wallets at Binance, the parent cryptocurrency exchange of WazirX registered in the Cayman Islands. The notice also mentions a transfer of approximately ₹1,400 crore from WazirX accounts to Binance accounts, and ₹880 crores from Binance to WazirX. WazirX has denied receiving such a notice and said it complied with all KYC and anti-money laundering rules.
Are Indian investors also in breach?
This is a legal gray area, since India has not passed any cryptocurrency laws. However, certain types of cryptocurrency transactions carry a higher risk of attracting penalties. These include transferring money abroad using cryptocurrency. Investors should avoid transferring money to a cryptocurrency exchange outside of India or dealing directly with users outside the country. If you cannot determine the location of the wallet you are trading with, avoid such a trade, until more regulatory clarity emerges. Keep track of all your transactions.
Will this affect crypto trading on Indian stock exchanges?
India’s crypto exchanges were already facing an unofficial bank squeeze, with many exchanges suspending direct acceptance of users’ rupee deposits. Banks were also sending warning emails to customers considered to have crypto-related payments on their accounts. Banks can take inspiration from the ED advice and extend the tightening potentially affecting withdrawals.
Should investors withdraw their investments?
While the ED Notice is a cause for concern, WazirX may be able to convince ED or the courts that it has not violated Fema. ED action also does not directly affect investors. But liquidity can dry up as a result of this action, making trading difficult or, in the worst case, leaving investors stranded with illiquid assets. Experts have said that if a particular exchange sees a loss of liquidity, you can move your cryptocurrency to another exchange, or even a cold wallet (over-the-counter holding) and perform peer-to-peer transactions.
What else should you keep in mind?
Investors must keep records of their transactions and pay taxes on their earnings. Depending on the frequency of trading, gains may be treated either as business income (in case of frequent trading) or as capital gains. The gains may have occurred even though they were not converted to Indian rupees, some experts say. For example, a trader who converts bitcoin to ether and returns to bitcoin with a profit, may also have to pay taxes on this transaction even if they do not convert bitcoin to Indian currency.
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