India's leading exchange WazirX was hacked for $230 million: previously cut off from cooperation by Binance due to alleged money laundering, with annual trading volume down 90%

Author: Nancy, PANews

Two years ago, WazirX attracted market attention due to a months-long acquisition dispute with Binance. Now, this Indian cryptocurrency exchange has once again become a hot topic of public discussion due to the theft of assets worth up to $230 million, drawing significant attention to the development of India's crypto market.

Nearly Half of Reserve Funds Stolen, Launching White Hat Bounty Program

On July 18, WazirX reported that a security vulnerability in its multi-signature wallet led to the theft of $230 million worth of crypto assets, nearly half of which was in SHIB. According to WazirX's transparency report disclosed in June, its asset holdings amounted to $503 million, indicating that the exchange lost over 45% of its reserve funds.

The next day, WazirX released preliminary investigation results regarding the attack, stating that since February 2023, WazirX wallets have been operating using Liminal's digital asset custody and wallet infrastructure services. The cyber attack stemmed from discrepancies between the data displayed on the Liminal interface and the actual content of transactions. During the attack, the information shown on the Liminal interface did not match the actual signed content. WazirX suspected that the payload had been replaced to transfer control of the wallet to the attacker.

In response to WazirX's "accusations," Liminal Custody was unwilling to "take the blame." Liminal Custody stated that its infrastructure had not been compromised, and all wallets (including WazirX's wallets) were secure. Unfortunately, three victim machines had malicious code injected during transactions, indicating that this was a complex and planned attack targeting a specific Gnosis smart contract multi-signature wallet. According to blockchain analysis firm Elliptic, North Korean hackers may be behind this hacking incident.

Currently, the WazirX hacker has sold all stolen assets for ETH, and the attacker's ETH holdings have exceeded 59,000 coins, now valued at over $200 million. To track and recover the stolen funds, WazirX has reported the incident to the Financial Intelligence Unit (FIU) and the Indian Computer Emergency Response Team (CERT-In), and has contacted over 500 exchanges to block identified addresses.

At the same time, WazirX has launched a 10% white hat bounty program to recover funds, inviting white hat hackers, blockchain forensic experts, and cybersecurity professionals from around the world to join this mission. The action plan includes tracking stolen funds, recovering customer assets, and conducting a more in-depth analysis of the cyber attack.

Additionally, due to the impact of the cyber attack on WazirX's ability to maintain a 1:1 asset collateralization, the exchange has temporarily suspended trading to conduct thorough data checks and security audit procedures, striving to enable withdrawals as soon as possible.

As a leading cryptocurrency exchange in India, WazirX's trading volume has also seen a significant decline. According to previously disclosed data from WazirX, the exchange's trading volume in 2023 has dropped to about $1 billion, a decline of over 90% compared to the same period last year, and a staggering 97% drop compared to 2022. This is, of course, closely related to the increasing regulatory pressure and heavy crypto taxation system in India.

Ownership Dispute with Binance Leads to Over 90% Decline in WazirX's Annual Trading Volume

WazirX first gained public attention as a partner for Binance's entry into the Indian market and was a target for acquisition by the latter. However, after WazirX was accused by Indian regulators of money laundering, Binance "distanced itself," leading to an ownership dispute. The outcome of this dispute also sowed the seeds for the recent theft incident.

In 2022, WazirX claimed it moved its base from India to Dubai due to India's new tax regime on crypto trading. Shortly thereafter, WazirX was accused by Indian law enforcement of being under investigation for two cases of money laundering and violations of foreign exchange rules, claiming that the platform was involved in laundering 27.9 billion rupees (over $350 million), and froze tens of millions of dollars in assets belonging to some of the exchange's executives.

Binance announced in 2019 that it had "acquired" the exchange, but after WazirX faced money laundering accusations from Indian authorities, Binance founder CZ immediately stated that the acquisition had never been completed, and that Zanmai Labs is the entity operating WazirX, established by the original founders, and that Binance never owned any shares in Zanmai Labs at any time. Binance only provided wallet services as a technical solution for WazirX and integrated off-chain transactions to save network fees, while WazirX was responsible for all other aspects of the exchange, including user registration, KYC, trading, and initiating withdrawals.

CZ's clarifying statement was immediately rebutted by WazirX CEO Nischal Shetty, who stated that WazirX was acquired by Binance, and that Zanmai Labs is an Indian entity owned by Nischal Shetty and his co-founders. Zanmai Labs was granted permission by Binance to operate trading pairs of Indian rupees and cryptocurrencies on WazirX. Binance operated the cryptocurrency trading pairs and handled cryptocurrency withdrawals. Users can verify this fact by accessing WazirX's TOS (Terms of Service). Furthermore, Binance owned the WazirX domain, root access to AWS servers, all cryptocurrency assets, and all cryptocurrency profits, and should not confuse Zanmai with WazirX.

Subsequently, both parties engaged in a months-long war of words, each holding firm to their positions. Binance believed WazirX was shirking responsibility for its misconduct, while CZ asserted that users should transfer their funds from WazirX to Binance, stating that Binance requested the transfer of WazirX's system source code, deployment, and operation in February 2022, but was refused by WazirX, leaving Binance unable to control their system. Binance also soon stopped supporting the off-chain transfer function between WazirX and Binance. Meanwhile, Zanmai Labs sought to resolve the ownership dispute with Binance through legal means.

This ownership dispute further escalated in 2023. In January 2023, Binance issued an "ultimatum," demanding WazirX issue a clarifying statement regarding their misleading relationship, retract Nischal Shetty's previous statements about Binance owning WazirX, and remove all Binance-related content from the terms of service, or Binance might terminate WazirX's service agreement by February 3. However, this demand was rejected by WazirX, which stated that the so-called "clarifying statement" was "unethical," and that Binance was attempting to use "media pressure and threats to force Zanmai to issue false and misleading statements as a 'clarification'." Moreover, WazirX stated that Binance's accusations were false and unverified, and that it had profited handsomely from its control over the exchange, a point WazirX emphasized in a tweet in May 2023, stating that Binance controlled the WRX token (Binance Launchpad project) and held all IE0 proceeds, with no quarterly burns conducted in the past five quarters (since January 2022).

Ultimately, Binance announced it would cease providing wallet and related technical services to WazirX in retaliation, leaving WazirX users unable to use Binance's wallet services. From then on, the two partners completely parted ways.

High Adoption Rate Attracts Crypto Companies to India, Regulatory Environment Changing

However, after ending cooperation with WazirX, Binance did not slow down its efforts to establish a presence in the Indian market, now capturing nearly 90% of the country's $4 billion in crypto holdings. The lucrative profits in the Indian market are a significant reason for crypto companies like Binance to expand their operations.

According to the "2023 Global Cryptocurrency Adoption Index" released by blockchain analysis platform Chainalysis, India ranks first in cryptocurrency adoption, indicating that India still holds an important share in the crypto market. In fact, the Indian Securities and Exchange Board announced plans to formally introduce T+0 by 2025 to attract investors and compete with cryptocurrencies.

Moreover, India's unfriendly regulatory policies towards the crypto market are showing signs of easing. In January of this year, the apps of exchanges like Binance and Kraken were requested to be blocked by Indian financial intelligence agencies for non-compliance with India's anti-money laundering rules, leading to their removal from the Indian Apple App Store. However, in May of this year, Binance and KuCoin became the first offshore crypto-related entities to receive approval from the Indian Financial Intelligence Unit (FIU), on the condition that they pay fines after a hearing with the FIU.

Additionally, there may be adjustments to India's heavy crypto tax regime. It is well known that the 30% income tax has severely impacted the development of crypto trading in the country. For example, since Indonesia introduced its crypto tax regime, its crypto tax revenue has dropped by 63% to $31.7 million in 2023. However, Indonesia is also planning to reassess the income tax and value-added tax levied on crypto trading this year, as cryptocurrencies are expected to become an indispensable part of Indonesia's overall economy in the near future.

It is important to note that the Indian market still faces regulatory uncertainties. The Indian Finance Minister recently stated that cryptocurrency regulation requires global consensus, and the Reserve Bank of India has also submitted its views on cryptocurrencies, emphasizing the macroeconomic risks associated with cryptocurrencies and issues related to tax evasion and fiscal stability.

In summary, the high adoption rate and the easing of strict regulatory attitudes may drive further development in the Indian market, while WazirX's theft incident may provide more market space for other crypto exchanges.