A Critical look at WazirX’s Smart Token Fund (STF)

I spent a few hours explaining WazirX’s STF to some disgruntled users who called it a scam and were banned by WazirX’s CEO Nischal Shetty on social media channels. But as it always is, I gave up explaining it to them because there was no winning in that argument. I blame it on Confirmation Bias.

“Confirmation bias is the tendency to give more weight to evidence that confirms our beliefs than to evidence that challenges them”, writes Kathryn Schulz in her book Being Wrong: Adventures in the Margin of Error

While I relied on the data at hand, he relied on the fact that he and other people who questioned Nischal were banned, which “means” it’s a scam because only a scammer would ban people who questions them.

So, I thought it is a good idea to have another look at the STF, and really paint the correct picture of what it really is and what are the risks.

STF is like Mutual Fund

We wrote about STF in an exclusive article earlier this month, before it launched. It is a Mutual Fund Style fund, where the fund manager will trade with your money, and obviously you either make profit or loss based on the fund manager’s trades.

Each user can buy an STF token, with USDT at its current price. There are three STF tokens live currently, XSTYX, XOOM and XMGD.

All three token prices are not driven by buyers and sellers, they are driven by the trades of the token owners. For instance, XOOM token owner has distributed the funds into USDT, BTC, ETH, and XRP. That has, at the time of writing, yielded 0.48% profit.

The Initial token price was 100 USDT, now the price is 100.4898 USDT. If anyone wishes to buy XOOM, they will now have to buy it at 100.4898 USDT. The STF holders, who wish to sell and book profits can place sell orders which will be executed at 1:00 AM everyday.

Why Would you Give your Money to someone else?

Everyone of us have wondered, what if we can just copy trades from good traders, and make profit. On WazirX, the identity of the STF owner is not revealed, yet. But you can keep track of their trades and profits. If the trader has been consistently profitable, nothing wrong with investing money with the person.

Otherwise, people like “Money Guru Digital” – Ashish Gautam, can tell their followers about their STF and ask them to buy it. The following message on his telegram channel became the root of skepticism against STF.

Ashish Gautam called his STF, “our token”, and hence people who I got into arguments with considered this a Crypto token.

Whether Money Guru is a good or a bad trader is not an argument I want to get into, but if his followers think he is a good trader, or like his trade signals, this is an opportunity for them to give their money to Money Guru and let him trade on their behalf.

Can Money Guru run away with their money? No. WazirX doesn’t allow STF owners to withdraw funds.

Can Money Guru make bad trades and lose a lot of money? Yes. He can. Bad trades affect the price of the token, thereby it is a loss for people who invested.

Is the money(USDT) invested in STF, created out of thin air? No. Users have to buy the STF with actual USDT. The STF owners also have to invest their own money to begin with.

Can the STF prices be manipulated? No. They completely depend on the trades taken by the STF owner.

Users need to evaluate these and many other risks before deciding to invest in an STF.

Are STF Legal?

It is Crypto. Nothing is illegal as there are no specified regulations for Cryptocurrencies. But can you do an STF with INR? Absolutely Not.

By legal definition, an STF owner is a discretionary portfolio manager who individually and independently manages the funds of each client. A portfolio manager has to abide by several rules in India, set up by Securities and Exchange Board (SEBI). But that is when you’re trading on markets regulated by SEBI.

WazirX’s STF are one of a kind, they certainly aren’t the first in the business of Crypto Fund Management. There are several accredited Crypto Funds in the world.

But, the way WazirX defers is how they allow anyone to become an STF owner. This opens the platform for anyone. The exchange is self-regulating the process of launching STFs, and that in many eyes looks suspicious. But what really are the alternatives?

Due Diligence by WazirX

Currently there are three STF funds on WazirX. We contacted one of the owners to know what WazirX checked before giving them an STF?

The exchange asked for the user’s PAN, Aadhaar, a selfie with an address proof and past three months trading records. The approved STF owners needed to have made profits in the past.

But, there is a problem, the STF owners are not made public. That means you as a user are putting your faith on someone whose trades need to do the talking and there aren’t enough trades done by anyone yet to make a decision.

It is a devil’s dilemma, and therefore people like Money Guru can thrive by asking their followers to buy the STF while the other STF traders have to wait until they show significant profits with their trading skills.

Ban or Not to Ban

Now, in my book STF is an experiment, not a scam. But when you launch something innovative you have to be ready for criticism. And criticism can range from mild to severe.

We have been critical of a lot of things in the past. That’s sort of our job as media, to keep a check on what is happening. And we’ve locked horns with WazirX in the past when our intern was blocked for asking questions related to their P2P exchange.

Blocking people on social media, almost never works. The person will only start using other channels to use that as a weapon. And in the world of social media, finding people with a common enemy isn’t really difficult. Then comes the troll army.

I am personally, against blocking anyone. But WazirX isn’t. They block people they deem to be trolling, which has now and in the past restricted some good critical voice. But at the end of the day, WazirX isn’t decentralised, their telegram groups aren’t decentralised, and hence they can do what they want.

For what it’s worth, WazirX and Nischal did listen to some of the comments and clarified STFs on twitter. Will it will change the minds of people who think STF is scam? I don’t think so, because it’s confirmation bias. I will look for evidence that suits my narrative.