Is triangular arbitrage illegal? Possibly not, but a group of traders on Zebpay have accused the exchange of blocking their accounts for some profitable trade they executed through this technique, while the exchange has accused the traders of “manipulating their systems to earn profit”.
Is this a systems error? Zebpay is yet to respond on the same, but till then, the traders claim they are at a wit's end about what they should do to retrieve their funds.
How it all began
On April 28th, 2022, when Md Ezaz Raza from Bhagalpur, Bihar, a full-time trader tried to open his ZebPay account, he was shocked to realise that his account had been blocked without prior notice.
Few hours later Raza received an email from the cryptocurrency exchange asking for level 2 KYC details since his account had crossed a certain limit of financial transactions. Raza said, “I was one of the top traders on the exchange and had been using the exchange for over a year by then. They had all my KYC details.” Yet he complied with the exchange's demands.
On May 5, ZebPay emailed him to inform him that his account was suspended due to “suspicious activity,” and was “pending further investigation”.
Raza raised several tickets on the ZebPay app. He tried to get in touch with them via email as well. Apart from this, he said, he constantly raised queries regarding the unceremonious blocking of his account on the exchange’s official Telegram group, but to no avail. “I was acquainted with their CRO before this incident. I bought the matter to his notice as well but to no avail,” Raza told Business Today.
Interestingly, he also noticed that there were a few more customers on Twitter and the official Telegram group of the cryptocurrency exchange who raised similar complaints. He took initiative and created a separate Telegram group involving the rest around May 5.
In a surprising turn of events, on May 18, ZebPay sent him an email that the exchange had filed a complaint against him with the Cyber Crime Police. “They sent me an email saying that they had filed a Cyber Crime complaint against me for manipulating their system at the Ahmedabad Cyber Crime Cell. I asked them about the reference number of the complaint several times, but they did not respond.”
Similar complaints from others
Several other customers, some of whom were a part of his new Telegram group, also got a similar email from the exchange. Moreover, their queries had also been deleted from the public Telegram group.
“They blocked me, and others, from all their support groups on Twitter and Telegram. They also deleted our previous messages complaining about the issue,” the full-time trader told Business Today.
All these ZebPay customers who received that email have one thing in common. They executed a triangular arbitrage trade on ZebPay involving BUSD, USDT, and INR.
Pappu Kumar from Bihar also had the same fate. He told Business Today, “I conducted triangular arbitrage from my account, from my sister’s and father’s account. We made a combined profit of more than Rs 35 lakh. Zebpay called me that day and asked me what was my income source, I informed them and they haphazardly disconnected the call and then blocked my account. Now all my funds are stuck in the exchange and nobody is ready to help me out. ”
Several other customers have come forward saying that Zebpay blocked their accounts asking for level 2 KYC verification after they executed the triangular arbitrage trade involving BUSD/USDT/INR.
Another customer from Rajasthan who chose not to be named in our report told Business Today that their funds, worth over Rs 78 lakh and have been blocked by the platform without any legitimate reasoning from the side of the exchange after the triangular arbitrage trade.
They told Business Today, “More than 45 days have passed, I have tried to reach out to ZebPay to get an answer but they have blocked me from all communication channels i.e. Twitter, Telegram, etc. I am undergoing mental stress and facing immense financial hardship because of the same.”
Interestingly, there were some other ZebPay users who had executed the triangular arbitrage trade, whose profits were in the lower thousands. They also received an email regarding the level 2 KYC, which was approved within a few days and they were then able to access their funds.
Is triangular arbitrage legal? Experts say - yes
Triangular arbitrage is a trading technique that aims to profit off of a price discrepancy between three different assets on the same exchange. According to crypto markets commentators and experts, triangular arbitrage is not by any means an illegal practice. Smit Khakhkhar, tech-diligence at Delta Blockchain Fund said, “Arbitrage is something that’s been done for years in the forex markets and it can be applied to cryptocurrency markets as well.”
Khakhkhar broke down the ZebPay issue in simple terms. He said, “In layman's terms, users were able to buy USDT for Rs 80, convert the USDT to BUSD and sell it for Rs 90.”
It is worth noting that both USDT and BUSD are stablecoins pegged to the dollar, which means the value of 1 USDT= 1 BUSD= 1 USD. The difference in price of stablecoins on Indian exchanges is because of supply and demand of the cryptocurrency.
Khakhkhar further told Business Today, “In this case, BUSD/INR market on Zebpay had price higher than other exchanges, probably due to a bug in their systems. Users were able to buy USDT/INR, which was trading at a normal price.”
He further explained, “ZebPay has a feature ‘Quick Trade’ where you can convert one asset into another at a price quoted by Zebpay. The users convert USDT into BUSD for an almost 1:1 ratio as they both are stablecoins, as the price of BUSD was already high on Zebpay, users made a quick profit.
He added, “This is three-way arbitrage, converting one asset into another then another and finally making a profit.”
What about blocked funds?
Raza had made a profit of nearly Rs 42 lakh on April 28 via the triangular arbitrage trade. Those funds are blocked in his account and are inaccessible.
Another ZebPay customer, who had a similar plight, but who preferred not to be named alleged, “I made an arbitrage profit of Rs 6-8 lakh. But then ZebPay blocked my account and demanded level 2 KYC details, despite the fact that I have already provided all details previously. I complied, yet all my funds, which were around Rs 1 crore on April 28 and are now inaccessible to me.”
He summarised, “I made an arbitrage profit of Rs 6-8 lakh via the Quick Trade section on ZebPay. But then ZebPay blocked my account and demanded level 2 KYC details, despite the fact that I have already provided all details previously. I complied, yet all my funds, which were around Rs 1 crore on April 28 and are now inaccessible to me.”
According to ZebPay’s website, Quick Trade was introduced in January this year. The website says that there is no waiting time for orders to get matched in Quick Trade, unlike in the case of the open order book system.
When Business Today reached out to ZebPay regarding the matter, the exchange said, “We have filed a police complaint against certain users in respect of their attempts to manipulate our system. Since the matter is currently being handled by the law enforcement authorities, we do not wish to provide any details at this stage.”
BT also tried to reach the exchange’s legal team and the CEO of the exchange, Avinash Shekhar. None of BT’s queries about the different levels of KYC, and the criteria for verification have been answered yet. We will update the story when Zebpay responds to our queries.
Need for regulation?
Sharat Chandra, vice president of EarthID stressed the need for regulations in the crypto industry. He highlighted, "The absence of crypto regulation puts investors' rights in jeopardy. Self-regulation practiced by exchanges should involve adequate provision for investor protection. Government should come forward and provide regulatory recourse to crypto investors."
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