In the aftermath of raids on various cryptocurrency exchanges by the Enforcement Directorate (ED), experts opine that the lack of defined rules to flag suspicious transactions by a regulatory body has made the exchanges attract all the attention of the Directorate. The freezing of funds, although aimed at tracing the money laundered by instant loan apps, will only hurt the existing retail users because they lack the same security against their investments as the money kept in banks.

The ED investigating money laundering against several NBFCs and their fintech partners for predatory lending practices violating the RBI guidelines. In the fund trail investigation, ED found that the fintech companies diverted large amounts of funds to purchase crypto assets on exchanges and then launder them abroad. The cryptocurrency exchanges whose assets have so far been frozen have been accused of lacking sufficient due diligence, violating KYC requirements, and being uncooperative.

Lack of regulations

Experts, however, believe that if there was a regulatory body that specified the functioning and mechanism of working of exchanges, as RBI does for other financial institutions, the issues could have been solved better. 

Mohnish Wadhwa, CEO of a business consulting firm CapDeck Advisors,  told BusinessLine, “As there is no specified regulatory framework, exchanges have set their own rules to flag abnormal activities being conducted in a wallet and they further freeze those wallets. Hence, there is a lot of ambiguity around what has been done right and what has been done wrong by these exchanges.”  

If the regulations come in, even the ED would have some direction to examine if the exchanges have followed the directives rightfully or not and conclude if the exchanges have followed their set of responsibilities, he added. 

Industry players opine that the exchanges wouldn’t be able to provide information about the suspicious wallets as there is no recipient KYC present in the ecosystem. Hence, freezing the funds of the exchange only hurts the users of the platform and doesn’t help track the laundered money trail. 

Naimish Sanghvi, Founder, Coin Crunch India, told BusinessLine, “In case of money freeze in the banks, the RBI guarantees the users of the refund, but in case of a crypto exchange, there is no such thing, which causes the users to lose the value of their funds.” Although the freeze is aimed at getting information on the trail of siphoned funds, he added that it does hurt users. 

These investigations will eventually lead to the government’s final take on cryptocurrencies. Wadhwa said, “All these ED drills will serve as a foundation for the choice of whether to regulate or ban cryptos in the country.” The user sentiment, however, has been hampered with exchanges getting on the directorates’ radar. Many are rethinking investing and have even withdrawn funds from the exchanges.

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