How can the government trace the cryptos if they are on decentralized wallets?

Because DeFi wallets are built on blockchain, which is a public ledger, they will have access to all of your transactions and the amount of money you sent or deposited if they have your wallet address. They cannot, however, connect the wallet address back to the individual. They will be unable to determine who owns it. However, if you have an account in WazirX and purchase a coin from WazirX and send it to another wallet address, WazirX will be aware of the transaction and will learn the address to which you sent the coin. Now, if the government requests Wazirx's documents or transaction history, Wazirx is obligated to comply because they are a registered corporation in India and must adhere to government regulations.