WazirX, one of the largest crypto exchanges in India, this week announced a minor concession of Rs 15 per INR fund withdrawal as a sop to its customers, perhaps in order to assuage user anxieties. But it has now controversially set aside Rs 100 crore of users’ funds as legal expenses. This decision comes as a result of the large-scale cyber hack leading to the loss of a majority chunk of user funds, which led WazirX into the legal limelight and disgruntled its users.
History of the Cyber Hack and Aftermath
The WazirX cyber attack on July 18, 2024, targeted a multi-signature wallet of the exchange—a key security feature designed to enhance crypto asset protection. But despite all these security features, this hacking incident resulted in the loss of crypto assets worth a whopping Rs 2000 crore, approximately $230 million USD. It resulted in nearly 45% of the user funds on the platform and stirred panic and outrage among the users of this exchange.
From a steadily growing user base and increased trading volumes, WazirX suddenly found itself in the midst of a crisis. Before the hack, it had a very strong user base of 1.6 crore active users, out of which 44 lakh had crypto assets. This incident seriously hampered the operations at the exchange and also badly dented users’ trust in it. Due to the backlash received from the users, WazirX imposed phased withdrawal limits. The users were allowed to withdraw 66% in two phases and gave a six-month window for 100% withdrawal of their crypto assets.
Legal Challenges and the Need for a War Chest
The situation slowly started to unfold, and the WazirX started facing legal actions coming from different quarters. A total of four different parties served four legal notices to the exchange for recovery post-hack incident of their funds. Among the notable ones, another prominent Indian crypto exchange, CoinSwitch, announced that it would file a suit against WazirX for recovering Rs 80 crore invested in the platform.
Against the above background of heightened litigation, the parent company of WazirX, namely Zettai Pte. Limited, has filed a detailed 52-page affidavit in the Singapore High Court. The affidavit filed in the Singapore High Court under the Insolvency, Restructuring, and Dissolution Act 2018 forms part of a key component of the strategy to handle the crisis. The filing has sought a stay order, which would provide temporary legal protection to WazirX from lawsuits, thereby giving time for restructuring operations and redressing user complaints.
The decision of using Rs 100 crore of users’ funds for meeting the legal cost and other ancillary expenditures has met with a mixed response. While this is a pragmatic move on the one hand to ensure that it can defend against the mounting legal pressure, it has also raised ethical concerns among the users as to whether WazirX should use funds of the users for this purpose, especially after the heavy losses already sustained by them.
WazirX
WazirX Affidavit: Understanding It
The affidavit filed by Zettai Pte Limited gives an insight into the internal turmoil the firm WazirX is going through in this complicated situation. It mentions the hunch of the firm over more legal actions from its user base, portraying them as “frustrated and hostile.” The affidavit says on August 24, 2024, it has already received over 9,700 withdrawal-related emails and platform messages, which implies extremely high user discontent.
In this affidavit, a reason given is that such a moratorium is needed in the interest of avoiding a raft of lawsuits that would swamp and deplete its resources from pursuing its restructuring process. Such measures, as it contends, would involve quite long and tedious legal disputes that may ultimately frustrate genuine attempts to help stabilize the platform and recover funds lost by users.
The Socialistic Loss-Sharing Policy and Recovery Plan
Another very critical aspect of WazirX’s strategy is the proposed recovery plan, basically a socialistic loss-sharing approach. As stated in the affidavit, the recovery plan was an automatically granted moratorium of 30 days, supposed to protect Zettai against legal actions and resolutions for winding up. In that case, the moratorium would be temporary relief to allow the company to pursue restructuring with no immediate threat of legal action.
On the other hand, the proposed plan means that pro-rata losses from the hack are to be allocated to its unsecured creditors, namely the majority of users. Therefore, the remaining group assets of $284 million would be distributed to users based on their account balance and claim. This method tends to fairly distribute the hack impact across all users, but it also prevents users from getting back their full lost value—a reality that has completely outraged user frustration.
WazirX is also in talks with 11 potential investors, which are referred to as “white knights, including major cryptocurrency exchanges and other strategic investors.” Injections of much-needed capital from these investors may help support some recovery of lost assets and bridge operational costs. This is still in the works, though, and will probably take some more time.
Town Hall and Binance Dispute
With growing concerns from its users and the need to stabilize the platform, WazirX has announced a town hall session on September 2, 2024. Apart from the recent developments, WazirX and their panel of advisors will be elaborating on the recovery plan and answering any queries the users may have. For many, this town hall is a key step in the process of rebuilding trust and providing some clarity to its users on a way forward.
Matters are further complicated in the continuing fight between WazirX and Binance, the world’s largest cryptocurrency exchange. The bone of contention constitutes a tug of war between the control and ownership of the WazirX platform. Binance did have a transfer deal with WazirX but tried to backpedal from it, leading to a public fight over the control of the digital assets within the WazirX platform.
The affidavit filed by Zettai reveals that Binance’s decision to close the wallets holding these assets—notwithstanding earlier reassurances from Binance CEO Changpeng Zhao—forced Zettai to take possession of the tokens to ensure continuity in the operations of the platform. Consequent to this, Zettai contracted Answer Eleven Pte Ltd., doing business as Liminal, for the secure custody of these assets. There is a dispute between them, and the details remain confidential. It has no doubt added one more layer of complexity to the troubles faced by WazirX.
Conclusion
In the wake of the after-effects of the cyber hack and the consequent legal battles, there seems to be a very unsure future staring back at the company. While the measures taken in the form of a moratorium, allocation of funds to cover the legal costs, and negotiations with prospective investors have been of essence for the survival of the platform, not one has been sufficient to allay the fears of its users.
