Is WazirX prioritizing its survival over user security through its “social loss strategy,” and how does this impact the Indian crypto community?
On July 18, WazirX, India’s largest cryptocurrency exchange, suffered a major cyberattack. Hackers targeted one of its multi-signature wallets and stole over $230 million worth of digital assets.
The attack saw the direct theft of 15,298 Ethereum (ETH), and the exploiter then swapped out various tokens such as Shiba Inu (SHIB), Polygon (MATIC), and Pepe Coin (PEPE) to amass a total of 59,097 ETH, impacting WazirX’s ability to maintain a 1:1 collateral with its assets.
To add fuel to the fire, WazirX halted all trading activity after prices on its platform crashed to levels far below those on other exchanges. Furthermore, WazirX also froze all withdrawals, whether in cryptocurrencies or Indian rupees, leaving customers unable to access their funds.
Given the scale of the incident, which affected 45% of user funds, the credibility of the exchange, which boasted over 15 million users, is now seriously in question. To address this crisis, WazirX has proposed a controversial recovery plan.
On July 27, the company announced a “social loss strategy,” which aims to distribute losses among users to maintain the stability of the platform. Under the plan, users will have immediate access to only 55% of their assets, while the remaining 45% will be locked up in Tether-equivalent tokens.
The move, which is intended to prevent disproportionate impact on any one group, has sparked a backlash on social media, with many users feeling betrayed by what they see as a blatant disregard for the security and safety of their assets.
Let’s dive into the details and understand the public’s reaction to this controversial strategy.
Choose your fish, but you can’t cash it out.
WazirX’s controversial recovery plan, which has been described as “Social Loss StrategyThis feature has sparked heated debate among its users.
According to correspondence shared with affected users, the exchange provided a survey offering two Options To recover their stolen money.
“Option A” allows users to access 55% of their funds for “trading and depositing” but limits withdrawals. This option also gives users priority in potential cashback returns.
On the other hand, “Option B” allows users to withdraw 55% of their assets “in a graduated manner”, but with a lower priority in the redemption list.
In both scenarios, WazirX stated that the remaining 45% of user assets will remain locked on the exchange as “USDT equivalent tokens,” which will only be returned if the company successfully recovers the stolen funds.
The Open Wallet Value (55%) will be calculated based on average prices from CoinMarketCap and select global exchanges as of July 21, 2024, 8:30 PM IST.
Registered users will receive an email with detailed instructions and a link to choose their preferred option. The deadline for responses is August 3, 2024, 07:00 AM IST.
However, this survey is not legally binding on users or WazirX. The final decision will be made after considering the survey results, ongoing investigations, the platform’s liquidity, and any evolving circumstances, the platform announced on July 29.
This plan has sparked widespread anger and skepticism. Many users see this strategy as a way for WazirX to avoid taking full responsibility for the losses.
Furthermore, the restrictions on withdrawals, coupled with the non-binding nature of the survey, make users feel that their assets are still at high risk.
WazirX’s Recovery Plan Faces Backlash
Public backlash against WazirX’s controversial recovery plan has been swift and intense.
Sumit Gupta, co-founder and CEO of CoinDCX, was among the first prominent figures to criticize the exchange’s handling of the situation.
X stated that the burden of losses should primarily fall on WazirX itself, using its own treasury and assets, rather than making customers bear the 45% loss.
Gupta also noted that the survey options were designed to protect the company, not its customers, calling the approach “complete nonsense.”
Brian Kotikate, COO of KoinBX, expressed similar sentiments in an exclusive conversation with crypto.news, referring to WazirX’s strategy of “nationalizing losses” as highly controversial.
He acknowledged the intentions behind the approach, but questioned how effective it would be in compensating for the losses suffered by affected users.
Meanwhile, calls for justice have been rising, with many users demanding strict intervention and criminal action against WazirX and its chairman, Nishal Shetty.
One user shared a message addressed to the DCP officer, insisting that an investigation be conducted by the Central Bureau of Investigation to determine whether the incident was a hack or an inside job.
Additional criticism of WazirX’s approach has come from various quarters.
Another vocal critic, Kashif Raza, pointed out several flaws in the proposed solution. Raza claimed that a picture of the asset valuation should have been taken before the hack, criticized the allocation and use of profits for WRX tokens, and questioned the fairness of punishing users who have tokens that were not stolen.
Reda also raised concerns about tax liabilities as well as user losses and called for transparency regarding WazirX’s financials and the use of profits to compensate victims.
The prevailing feeling is one of betrayal and frustration, with many questioning the fairness, legitimacy and transparency of the recovery plan.
In response to these criticisms, Nishal Shetty, CEO of WazirX, stated that the survey provided to users was an initial step to understand their opinions and is not legally binding.
Shetty assured users that a feedback form will be launched soon to gather more ideas and that the team is studying all the feedback received to determine the next steps.
Take the taxes and stay calm.
India has emerged as a global leader in cryptocurrency adoption, Decoration Chainalysis’s Global Crypto Adoption Index September 2023. However, this enthusiasm appears to be one-sided, with governments and regulators remaining conspicuously silent on the subject.
In the 2022 budget, the government imposed strict income tax rules on cryptocurrency transfers, imposing a hefty 30% tax on any income earned from such transactions. No deductions are allowed, except for the cost of acquisition, and losses cannot be offset against other income or carried forward to future years.
The irony is clear: while the government is quick to tax crypto gains, it offers no safety net when things go wrong.
Meanwhile, the Reserve Bank of India has also remained silent, with the latest noteworthy statement being: Coming From Deputy Governor Mr. T. Rabbi Sankar in February 2022.
In his speech, he pointed out the risks that cryptocurrencies pose to the financial system, comparing them to speculative assets that have no intrinsic value. He warned of the destabilizing effects they could have on monetary policy and financial stability.
This approach has created a risky environment for investors. On the one hand, they face high taxes and strict regulations; on the other hand, they receive no support or protection from the government during crises, such as the current Wazirx disaster.
At this point, it appears that both Minister X and the government have prioritized their own interests over those of individual investors. The lack of transparency and support from both parties has left investors feeling abandoned and betrayed by their partners.
As India continues to lead the way in crypto adoption, it is imperative that the government engages more actively and constructively with the industry. Ignoring the issue is not a viable long-term strategy.
