WazirX’s Restructuring Sparks Fresh Crypto Contagion Fears

• WazirX users panned the company’s handling of last month’s hack.
• The exchange revealed it cannot meet its liabilities and will file for restructuring.
• Fears are growing of a potential Terra Luna-style contagion event. 

Crypto hacks continue to plague the digital asset industry, hindering broader adoption. On July 18, India’s largest cryptocurrency exchange, WazirX, fell victim to a multi-sig wallet exploit, resulting in the loss of Ethereum-based tokens valued at approximately $235 million.

Last week, WazirX revealed that it is unable to meet its liabilities due to the hack. While a plan is in place to return some rupee funds, resolving crypto liabilities will require company restructuring through the Singapore High Court. To make matters worse, further inquiries by industry figures suggest a potential Terra Luna-style contagion event may be unfolding.

Is a WazirX-Led Contagion About to Erupt?

WazirX’s initial response to the hack faced significant backlash from its user base. The freezing of withdrawals and socialized losses proposal frustrated many users , who were worried about bearing the losses. 

WazirX confirmed users’ worst fears on August 23 by revealing the company was effectively insolvent . The exchange announced its intention to file for restructuring in the Singapore court system, marking a significant turning point in the ongoing saga and underscoring the severity of the exchange’s financial situation.

Aditya Singh, co-founder of the YouTube channel Crypto India, has been conducting his own investigation. Singh had been vocal in calling for WazirX to provide a transparency report detailing holdings for users and institutions.

Singh’s investigation revealed alarming information about the interconnectedness of Indian crypto exchanges. Citing a recent CoinSwitch Proof of Reserves report, Singh noted that the exchange keeps 15% of its holdings with partner exchanges, including WazirX.

Singh likened this practice to overnight lending in traditional banking and urged all exchanges to disclose whether they have been affected by the WazirX incident.

Fiat Withdrawals Open

While WazirX’s update is concerning, it did offer some solace for users by outlining a phased approach to lifting rupee withdrawal restrictions .

From August 26 to September 8, users can withdraw up to half of 66% of their rupee balance. The remaining half of this 66% will be available for withdrawal between September 9 and September 22.

However, the fate of the remaining 34% remains uncertain, with WazirX stating that its recovery depends on resolving ongoing disputes and investigations by local enforcement agencies.

Some users have reported that WazirX is requesting additional Know Your Customer (KYC) and Anti-Money Laundering (AML) information before processing rupee withdrawals.

The situation concerning crypto withdrawals is even more uncertain. The Singapore High Court will address this issue as part of the restructuring proceedings. As a result, users are left in limbo, unsure of when funds will be returned or what potential losses they might face.

On the Flipside

• Restructuring refers to working with creditors to repay debt without becoming legally insolvent.
• CoinSwitch’s precise exposure to WaxirX is unknown, but the risk is spread across three other exchanges.
• Exchanges disclosing holdings with WazirX could trigger negative sentiment.

Why This Matters

The ripple effects of WazirX’s troubles highlight the interconnected nature of the crypto ecosystem.

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