Are users paying for the exchange’s failures?

Is WazirX prioritizing its own existence over user safety with its ‘socialized loss strategy’ and how is this affecting the Indian crypto community?

On July 18, India’s largest cryptocurrency exchange WazirX faced a serious cyberattack. Hackers targeted one of its multisig wallets and escaped with $230 million worth of digital assets.

The attack directly stole 15,298 Ethereum (ETH), after which the attacker swapped various tokens including Shiba Inu (SHIB), Polygon (MATIC), and Pepe Coin (PEPE) to amass a total of 59,097 ETH, impacting WazirX’s ability to hold 1:1 collateral with its assets.

Adding fuel to the fire, WazirX halted all trading activities as prices on their platform dropped far below levels on other exchanges. Furthermore, WazirX froze all withdrawals in both crypto and INR, leaving their customers unable to access their funds.

Considering the scale of this incident, which affected 45% of user funds, the credibility of the exchange that once boasted over 15 million users is now seriously questionable. To address this crisis, WazirX has proposed a controversial bailout plan.

On July 27, they announced a “socialized loss strategy” that aims to spread losses among users to maintain platform stability. Under this plan, users will only have immediate access to 55% of their assets, while the remaining 45% will be locked in Tether-equivalent tokens.

The move, which aims to prevent disproportionate impact on any single group, has sparked a fierce backlash on social media, with many users feeling betrayed by what they perceive as a clear disregard for the security and integrity of their assets.

Let’s dive into the details and understand the public’s reaction to this controversial strategy.

Pick your poison but you can’t turn it into money

WazirX’s controversial recovery plan, dubbed the “socialized churn strategy,” has sparked heated debate among its users.

According to correspondence shared with affected users, the exchange presented a survey offering two options for getting their stolen funds back.

“Option A” allows users to access 55% of their funds for “trading and depositing,” but restricts withdrawals. This option also gives users priority in potential recovery revenues.

On the other hand, “Option B” allows users to withdraw 55% of their assets “in a gradual manner” but with a lower priority in the recovery queue.

In either scenario, WazirX notes that the remaining 45% of user assets will remain locked as “USDT-equivalent tokens” on the exchange and will only be returned if the firm successfully recovers the stolen funds.

The value of the unlocked portfolio (55%) will be calculated based on average prices on CoinMarketCap and selected global exchanges as of 21 July 2024, 20:30 GMT.

Registered users received an email with detailed instructions and a link to select 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 platform announced on July 29 that the final decision will be made after considering the survey results, ongoing investigations, the liquidity of the platform, and evolving conditions.

Dear WazirX Tribe,

Thank you for your active participation in our latest survey dated July 27, 2024. We would like to clarify that this survey is a preliminary step to understand your views and is not legally binding on users or the WazirX platform.

This survey… pic.twitter.com/8BkbjhTCjM

— WazirX: India Ka Bitcoin Exchange (@WazirXIndia) July 29, 2024

This scheme has sparked widespread anger and skepticism, with many users perceiving the strategy as a way for WazirX to avoid full responsibility for losses.

Moreover, the restrictions on withdrawals and the non-binding nature of the survey make users feel that their assets are still at critical risk.

WazirX’s bailout plan faces harsh backlash

Public backlash to WazirX’s controversial bailout plan has been swift and harsh.

Sumit Gupta, co-founder and CEO of CoinDCX, was one of the first prominent figures to criticize the exchange’s handling of the situation.

In X, he stated that instead of customers suffering a 45% loss, the burden of the loss should be borne primarily by WazirX itself using its own treasury and assets.

I hate to say it but the way @WazirXIndia the community that is handling this whole situation is not in the first place and this is not going to end well for them IMO. This unfortunately hurts other ecosystem participants as well.

The initial contribution to damages must ALWAYS come from the Company…

— Sumit Gupta (CoinDCX) (@smtgpt) July 29, 2024

Gupta also said the survey options were framed to protect the business rather than its customers, calling this approach “complete nonsense.”

KoinBX’s COO Brian Kuttikat expressed a similar view in an exclusive chat with crypto.news, saying that WazirX’s strategy of “socializing losses” is quite questionable.

He acknowledged the intentions behind the approach but questioned its effectiveness in compensating the losses faced by affected users.

Meanwhile, calls for justice have also grown louder, with many users demanding strict action and punitive action against WazirX and its chairman Nischal Shetty.

A user shared a letter addressed to the DCP officer, stating that a CBI investigation should be conducted to determine whether the incident was an attack or an insider’s job.

CBI investigation is imperative to determine whether this happened. #Wazirx The incident was a hack or an insider’s work. If it turns out to be a hack, I may offer my support in the future. However, uncovering the truth is my priority and I am determined to relentlessly pursue justice, even

1/2 pic.twitter.com/Qmh2GmNJym

— Justice For WazirX Users (@IndiasCrypto) July 28, 2024

Criticism of WazirX’s approach continues to come from various quarters.

Another vocal critic, Kashif Raza, outlined several flaws in the proposed solution. Raza argued that a snapshot of asset valuation should have been taken prior to the attack, criticized the allocation of WRX tokens and the use of profit, and questioned the fairness of penalizing users with non-stolen tokens.

Is WazirX Solution Unacceptable?

1) The photo must be taken on or before July 18, 2024.

2) 30% of WRX tokens were allocated to WRX foundations. The team and the Foundation made some money from the WRX tokens that could be paid out.

3) Why are non-stolen… users… pic.twitter.com/fW5JkC7NO9

— Kashif Raza (@simplykashif) July 29, 2024

Raza expressed concerns over user losses as well as tax liabilities and demanded transparency regarding WazirX’s financials and use of profits so that victims can be compensated.

The general feeling is one of betrayal and disappointment, with many questioning the fairness, legality and transparency of the bailout plan.

Following these reactions, WazirX President Nischal Shetty stated that the survey presented to users was a preliminary step to understand the opinions of the users and that it was not legally binding.

1. This survey is a preliminary step to learn your opinions.
2. This survey is not legally binding on users or WazirX.
3. We will soon launch the feedback form to collect more ideas
4. We are now reviewing the next steps based on all feedback received

This is an important… https://t.co/tcdDjWzIYI

— Nischal (Shardeum) 🔼 (@NischalShetty) July 29, 2024

Shetty assured users that a feedback form will be launched soon to collect more ideas and the team is evaluating all the feedback received to determine the next steps.

Take taxes and keep quiet

India has emerged as a global leader in crypto adoption, topping Chainalysis’ Global Crypto Adoption Index in September 2023. However, this enthusiasm appears to be one-sided, with the government and regulators remaining conspicuously silent on the matter.

The government introduced strict income tax rules for crypto transfers in its 2022 budget, taxing income from these transactions at a high rate of 30%. No deductions are allowed other than the cost of acquisition, and losses cannot be offset against other income or carried forward to future years.

The irony is obvious: while the government is quick to tax crypto profits, it offers no safety net when things go wrong.

Meanwhile, the Reserve Bank of India (RBI) also remained silent, while the last notable statement came from its Vice Governor Shri T. Rabi Sankar in February 2022.

In his speech, he discussed the risks of cryptos to the financial system, comparing them to speculative assets with no intrinsic value, and warned about the destabilizing effects they could have on monetary policy and financial stability.

This approach has created a precarious 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 like the ongoing WazirX fiasco.

At this point, both WazirX and the government seem to have prioritized their own interests over the interests of individual investors. The lack of transparency and support from both parties has left investors feeling abandoned and betrayed.

As India continues to lead in crypto adoption, it is imperative that the government engages with the sector more actively and constructively. Ignoring the issue is not a viable long-term strategy.