An entirely predictable scam

It's a scandalous yet entirely predictable spectacle. The CEOs of WazirX, a crypto exchange that claims to be India's largest, and Binance, a crypto exchange that claims to be the world's largest, are having a public fight on Twitter about whether the latter has an ownership stake in the former. The funny thing is that this argument is the opposite of the normal nature of such disputes. In such corporate conflicts, the antagonists try to claim ownership from each other. Here, these two are each trying to claim that the other is the owner!

Why is this? You can read the tiresome and all too predictable details elsewhere - I'm not going to repeat them here. I'm here to re-emphasise something that I've been saying and writing regularly since January this year: Quite apart from the problem of cryptocurrencies as an investment, the entities that call themselves crypto exchanges are a huge legal blackhole. The very existence of these entities is an open invitation for all kinds of scams, both at the level of duping customers as well as large-scale malfeasance of the kind that is now being investigated in WazirX.

Consider that these exchanges are even now an entirely unregulated business. The entities that call themselves exchanges are nothing of the sort in any legal sense. They are businesses that take your money and in exchange, show you some numbers and a graph on your screen. To draw a parallel to stock trading, these crypto exchanges are the broker, the market maker, the exchange, the depository and SEBI all rolled into one and you have only their word that they are doing any of these various jobs with any degree of honesty. This is the actual, operational meaning of the word 'unregulated'.

Financial regulation always has to be based on the idea that handling other people's money is the most dangerous temptation in the world and given the chance anyone who has the opportunity will do something shady. Every entity that you can deal with for anything money-related, whether it is a bank or an insurance company or a mutual fund or a stock exchange or even a phone wallet operator is heavily regulated - except these so-called crypto exchanges. What a ridiculous situation!

Think about it. Here are these entities which deal in these so-called 'currencies' which are designed to be anonymous, which can move around cross-border controls or accounting with ease, which can be interconverted to and from any real currency in the world. Moreover, trading and speculation apart, the only real use that anyone in the world has for these currencies is paying ransomware and other criminal activities. So now if the financial authorities suspect that there is something shady going on in one exchange, then why is anyone surprised?

If the current state of Indian financial regulation is any guide then it would appear that our country's regulatory authorities trust this WazirX or Cointhis or Cointhat more than they trust, say, State Bank of India. Given what has been happening recently, I hope that a real crackdown is coming. However, one can't help noticing that the general tone of media coverage of the investigation into WazirX has the 'one-bad-apple' sort of an approach. As if crypto is a generally clean business except maybe there is the one bad apple here or there. It would be a grave error to fall for this idea. This is a business designed for bad apples and you'll probably find many more.

All things considered, the very existence of crypto exchanges is a large regulatory gap which needs to be plugged urgently. In India, we have a tightly regulated financial system. There is a reasonable expectation on the part of citizens that entities that are openly operating as financial intermediaries of any sort must be monitored and regulated by some part of the government. In the case of these outfits that have declared themselves to be cryptocurrency exchanges, the government and the various financial regulators are failing this expectation.

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No regulations, no rules, no jhanjhat
Crime and speculation