WazirX Hack Sparks India Crypto Exchange Liability Debate

• India's crypto ecosystem lacks a comprehensive regulatory framework, leaving users vulnerable to losses.
• The recent hack of WazirX resulted in $230 million worth of assets being stolen, highlighting the need for clearer accountability measures.
• Courts have been forced to step in and provide guidance on key issues due to the lack of clear regulations.
• A dedicated market regulator is needed to provide clear guidelines on customer asset safeguarding and remedies for losses.

The vacuum is being filled by courts to some extent, not Parliament. We know what it is not. It is not currency or legal tender (settled since IAMAI v. RBI and repeated by the RBI); it is likely not a 'security' unless a specific token is structured or notified to fall within section 2(h) of the SCRA, which no general instrument does.

The Indian government has been actively engaging with the crypto space, imposing taxes and regulations on various aspects of cryptocurrency trading. However, a closer examination reveals that these measures are piecemeal and do not address the fundamental question of accountability when things go wrong. The recent hack of WazirX, which resulted in the theft of $230 million worth of assets, has brought this issue to the forefront. Thousands of users were left wondering who was responsible for their lost funds, highlighting a glaring gap in India's regulatory framework. This lack of clarity is not limited to cybersecurity or blockchain technology; it extends to the very nature of crypto businesses and their obligations towards customers.

In the absence of a comprehensive legal framework, courts have been forced to step in and provide guidance on key issues. Anirudh Rastogi, Founder of Ikigai Law, notes that India still lacks a statutory characterisation of crypto assets outside the Income-tax Act. This vacuum has led to a patchwork of laws being applied to specific disputes, with lawyers advising clients relying on a combination of the Income-tax Act, PMLA, the Information Technology Act, and other statutes. While this may provide some clarity in individual cases, it does not address the broader question of accountability in the crypto space.

The Prevention of Money Laundering Act (PMLA) framework provides a compliance backbone for anti-money laundering purposes, but it was never designed to function as a market conduct regulator. This distinction is crucial in understanding the limitations of India's current regulatory framework. Anti-money laundering laws require exchanges to identify customers and report suspicious transactions, but they do not prescribe how customer assets should be safeguarded or what remedies customers have if assets are lost or mismanaged. The WazirX episode has highlighted the need for a dedicated market regulator that can provide clear guidelines on these issues.

Lawyers advising clients on Indian crypto exchanges should watch for the ongoing litigation and regulatory developments, as they may impact the liability of exchanges for lost customer assets. This includes the potential establishment of a dedicated market regulator or legal framework prescribing standards for crypto businesses.

Source: Original reporting via {Source}