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Decrypting The Fate Of Cryptocurrency Investors under The Indian Insolvency Regime

The author is Richik Dadhich, fourth year student at National Law University, Jodhpur.

The recent ownership dispute between India’s largest cryptocurrency exchange, WazirX, and its Chinese counterpart, Binance became a major cause of worry for Indian cryptocurrency investors. These concerns were aggravated after the exchange platform’s assets were frozen by the Enforcement Directorate.

Now, if the situation worsens and the user base shrinks further, the platform might have to file for bankruptcy or face insolvency proceedings in accordance with Insolvency and Bankruptcy Code, 2016 (hereinafter “IBC”). These events would resonate with the recent instances of cryptocurrency platforms such as Voyager and Celsius Network filing for bankruptcy under Chapter 11 of the United States Code, 1926.

Considering the underdeveloped state of cryptocurrency jurisprudence in India, this unprecedented event would raise several legal issues for consideration. Most importantly, the fate of more than a hundred million Indian crypto-investors would be at stake, as they would be facing various hurdles.

Legal Status of Cryptocurrencies in India: A Grey Area

The position regarding the legality of cryptocurrencies is subject to constant change. The Reserve Bank of India (hereinafter “RBI”) had taken note of the various underlying issues in cryptocurrency trading such as the possibility of fraud, high volatility, lack of consumer protection etc. in its Financial Stability Reports and Press Releases. Eventually, the RBI released a circular in April 2018 which banned the provision of banking services to any person dealing with cryptocurrencies. In other words, exchanges through which cryptocurrencies were traded could no longer maintain a bank account, thereby putting an end to the business of cryptocurrency trading.

RBI’s circular was later quashed by the Supreme Court in the case of Internet and Mobile Association of India v Reserve Bank of India (hereinafter “IMA”). However, an Inter-Ministerial Committee was constituted by the Ministry of Finance to look into the regulatory framework for cryptocurrencies. The committee also reached the conclusion that all virtual currencies shall be banned and proposed a draft bill for the same. The said bill is currently pending before Parliament. Recently, in February 2022, RBI’s Deputy Governor had again called for a complete ban on cryptocurrencies.

In addition to this, the status of cryptocurrencies is yet to be decided by the judiciary, and it is unclear whether they could be treated as a property, an asset, as goods or as a foreign security. In the IMA Case, the Apex Court had also addressed this ambiguity while observing that :

“… courts in different jurisdictions have identified virtual-currencies to belong to different categories ranging from property to commodity to non-traditional currency to money. While each of these descriptions is true, none of these constitute the whole truth”

Cryptocurrencies as Property Under IBC

For successful enforcement of insolvency claims, it must first be determined whether cryptocurrencies are property or not. Further, it has to be determined whether these exchanges act as a custodian of the cryptocurrencies or merely facilitate a peer-to-peer network.

Section 3(27) of IBC states that ‘property’ includes: “money, goods, actionable claims, land and every description of property situated in India or outside India and every description of interest…” It could be seen that this definition of property is identical to the definition provided under Section 436 of the British Insolvency Act, 1986. It is well settled in English Courts that this definition is of broad amplitude, and could take into account every description of property.[1]

A similar stance has been taken in the 2020 Report of the Insolvency Law Committee, where it has been observed that Section 3(27) of the IBC provides a wide and inclusive definition. Considering this, attention must be given to the use of the phrase “and every description” in the sub-section, which shall allow cryptocurrencies to be treated as a property.

Perhaps, the inclusion of cryptocurrencies within the ambit of property under IBC could also be substantiated by looking into the judgements on property and similar case laws from other jurisdictions.

In the landmark English case of National Provincial Bank Ltd. v. Ainsworth, Lord Wilberforce had laid down the factors for determining property. For the criteria to be satisfied, the property must be “i) definable; (ii) identifiable by third parties; (iii) capable in their nature of assumption by third parties; and (iv) capable of some degree of permanence”. This four-pronged test has been relied upon by the Indian Courts in multiple cases, including Shakti Insulated Wires Ltd. v. Joint Commissioner of Income Tax and the IMA Case.

In the context of cryptocurrencies, this test has been applied by the Courts across various jurisdictions such as in the United Kingdom in the case of AA v. Persons Unknown & Others Re Bitcoin, and in Singapore in the case of B2C2 Ltd. v. Quoine Pte Ltd. Both of these cases have been cited with approval by the Supreme Court in the IMA Case.

Now, in Ruscoe and Moore v. Cryptopia Limited (hereinafter “Cryptopia”), the Court categorically applied the four-pronged test and elaborated how each of the aspects have been fulfilled by cryptocurrencies (see paragraphs 104-120 of the case). To summarize the Court’s position, cryptocurrencies satisfy the test as they (i) have been defined and (ii) identified by the Courts, (iii) are capable of being traded on exchange platforms by third parties and (iv) are permanent considering the fact that each cryptocurrency is backed by blockchain and is traceable through public recordkeeping.

Hence, it was held that “Cryptocurrencies meet the standard criteria outlined by Lord Wilberforce to be considered a species of “property”. They are a type of intangible property as a result of the combination of interdependent features.”

From a perusal of all the aforementioned cases, it becomes clear that cryptocurrency is an intangible property which must be subjected to insolvency proceedings in India too.

Categorizing ‘Investors’ as Crypto-Creditors

The creditor, corporate debtor and existence of a debt are the primary actors in an insolvency proceeding under IBC. In case of a default, the creditor takes control of the debtor’s property with the help of the adjudicating authority and the appointed insolvency professional. There are primarily two kinds of creditors under IBC, financial creditors and operational creditors. Both of these possess different rights, claims and motivations.

Section 5 of the IBC provides for the definitions of financial creditor and financial debt. While Section 5(7) of the Code provides that a financial creditor means any person to whom a financial debt is owed. The term ‘financial debt’ has been defined under Section 5(8) of the Act, which includes debt along with interest, which is disbursed against the consideration for the time value of money, and it may include any events as mentioned in sub-clauses (a) to (i).

As held in Nikhil Mehta v AMR Infrastructure, the key feature of a financial transaction under section 5(8) is its consideration for time value of money. Further, in Utsav Securities Pvt. Ltd v Timeline Buildcon, the adjudicating authority highlighted the legislative intent behind this definition while stating that it covers the transactions which are “usually for a sum of money received today to be repaid in a period of time in a single or a series of installments in the future

From this, it is clear that the cryptocurrency investors on exchange platforms will not be categorized as financial creditors. In cryptocurrency exchanges, no such debt is disbursed against the consideration of time value of money and no repayment with interest is taking place.

Under Section 5(21) of the IBC, operational debt is a claim in respect of the provision of goods or services. Section 2(7) of the Sale of Goods Act, 1930 provides a broad definition of ‘goods’ and includes all movable property like stock, shares, and even commodities. The only exceptions to the definition are actionable claims and money.

It has already been clarified by the RBI and the Supreme Court in the IMA Case that cryptocurrencies cannot be accorded the same status as money, fiat currency or legal tender. The previous section explained how cryptocurrencies should fall under the definition of property. Based on this, it could be inferred that these movable goods are a sub-set of property, and cryptocurrencies would thus fall within this sub-set.

Thus, in a scenario where a creditor ‘loans’ a certain amount of cryptocurrency to a corporate debtor, it would qualify as an operational debt under IBC and the exchange is liable to pay when a default occurs. Accordingly, the adjudicating authority can order restructuring in case of a default and the insolvency professional would take control of all the assets including cryptocurrency. In the context of ongoing insolvency proceedings against Celsius and Voyage, legal experts have already claimed that: there’s a strong likelihood that… users will be treated as unsecured [operational] creditors

Mt. Gox Against Cryptopia: Ambiguity Arising from Platforms’ Terms of Use

The above-mentioned approach assumes that all the cryptocurrency stored in the investor’s digital “wallet” would be the platform’s assets. This approach has already been taken up by the Japanese Court in the Mt. Gox Case, where the resolution professional had taken control of the firm’s assets and subsequently sold the majority of the Bitcoins held by the firm.

However, in a stark contrast with Mt. Gox Case, it was held by Cryptopia that the exchange platform was merely holding the cryptocurrency as a trust, with no ownership rights. Based on this, the users were entitled to an unconditional and full return of their funds.

Now, the User Agreement and Terms of Use of some Indian Crypto-Exchanges might also be worded in a manner to imply that the cryptocurrencies would exclusively belong to the account holders. If the certainty of intent could be established, it could also be said that the cryptocurrency is being held on ‘trust’ as per Section 6 of the Indian Trusts Act, 1882. Alternatively, Section 36(4)(a)(iv) of IBC could also be applied if it is established that the exchange platform only has the right to use the assets without any transfer of title or ownership. This would exclude the cryptocurrency from the liquidation estate.


In light of the conflicting judgements across various jurisdictions, it is clear that the verdict of the Indian Courts on whether the investors would be entitled to their funds would be highly subjective, based on multiple factors such as classification of cryptocurrency as property, designation of investors as creditors under IBC, the Terms of Use of the exchange platforms, and ultimately, the legality of cryptocurrency trading in India. The discussion also highlights that legislative clarity is also needed to ward off the uncertainty regarding the inclusion of cryptocurrencies under the liquidation estate.

Recently, the Indian Computer Emergency Response Team (CERT-In) had mandated all crypto-platforms to maintain customer data records. Similarly, specific guidelines must be formulated in order to bring uniformity in their User Agreements. This would ensure that the platforms do not have an unfair advantage while undergoing liquidation.

Lastly, it must be noted that value maximization is one of the key objectives of IBC. Considering the bearish nature of crypto-market over the past few months, it is hoped that the judiciary would resolve these matters in an expedient manner when the case comes up. Otherwise, the entire process would turn out to be a futile exercise for the investors, as well as the creditors.

Endnote [1] Bristol Airport PLC v Powdrill [1990] Ch 744.

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