WazirX Clears Air on ‘Withdrawal Management Polls’ Following $230 Million Hack
Please note that we are not authorised to provide any investment advice. The content on this page is for information purposes only.
Indian cryptocurrency exchange WazirX is facing scrutiny from the crypto industry and its customers following a contentious “Withdrawal Management Poll” in the wake of the $230 million hack, where 45% of customer’s funds were compromised.
WazirX Poll and Socialized Loss Strategy
On July 27, WazirX launched a “Withdrawal Management Programme Opinion Poll” to fairly allocate the consequences of the $230 million hack among the victims.
The poll presented customers with two options: receive immediate access to 55% of their funds, with no withdrawals permitted, and gain priority consideration for any future recovery proceeds or access 55% with withdrawals and receiving second priority for potential recovery proceeds.
However, the exchange’s attempt to involve users in the decision-making process backfired, as the poll was met with widespread criticism from affected users and members of the crypto community.
Hate to be saying this, but the way @WazirXIndia is handling this entire situation isn't community first and this IMO won't go down well for them. This sadly is also hurting the other ecosystem participants.
The first contribution to losses should ALWAYS come from the Company…
— Sumit Gupta (CoinDCX) (@smtgpt) July 29, 2024
In response to the widespread criticism, WazirX and its co-founder Nischal Shetty came out to clarify that the poll was “not legally binding.”
They explained that it was a preliminary step to gauge customer opinions, and they will soon launch a feedback form to gather more ideas.
1. This poll is a preliminary step to understand your opinions.
2. This poll is not legally binding upon the users or WazirX
3. We will soon launch feedback form to collect more ideas
4. We are now looking into next steps based on all the feedback receivedThis is a major… https://t.co/tcdDjWzIYI
— Nischal (Shardeum) 🔼 (@NischalShetty) July 29, 2024
If WazirX were to follow the socialized loss strategy, regardless of hackers stealing funds across over 200 different cryptocurrencies, the losses would be distributed equally among all users.
This means that even users who held cryptocurrencies not involved in the breach will only have access to 55% of their funds.
According to the draft, the exchange plans to use the deducted tokens to balance the portfolios of users who lost more than 45% of their tokens.
For users whose holdings were entirely in lost cryptocurrencies, such as SHIB (Shiba Inu), WazirX will convert 45% of these holdings into USDT.
The remaining balance will be reconstituted as a mix of different crypto assets, aiming to stabilize users’ portfolios.
Notably, users who held the Indian rupee (INR) within the exchange are not affected by the loss distribution and can withdraw their funds, subject to withdrawal limits.
Rationale Behind the Strategy And Community Reactions
WazirX stated that it had two options to handle the situation: legal proceedings or socialized loss distribution.
Legal recovery could be lengthy and prevent users from accessing their funds until the process concluded.
The company highlighted that the outcome of legal proceedings often results in distributing whatever assets remain among users, akin to their chosen socialized loss strategy.
WazirX advocates for the socialized loss distribution method, citing expedited fund recovery and plans to offset the shortfall through future profits, strategic acquisitions, partnerships, and retrieval of stolen assets.
However, the socialized loss distribution method has raised concerns among industry observers.
Nikhil Pahwa, founder of MediaNama, criticized this approach, suggesting it amounts to taking assets from users whose cryptocurrencies were not affected by the hack.
He argued that WazirX is overstepping its role as an exchange by accessing and redistributing user assets without consent.
Crypto are treated under Indian law as digital assets. If WazirX steals them from some users to distribute to others, then can a criminal case be filed against them?
Lawyers on my timeline?
— Nikhil Pahwa (@nixxin) July 27, 2024
There has also been contention about utilizing unaffected cryptocurrencies to cover losses, which many deemed improper and potentially illegal, as it involves holding user funds against their will.