• Ribhav Pande and Daksh Aggarwal

Decrypto-ing IBC: Virtual Currency Exchanges in Insolvency (Part 1)

-Ribhav Pande and Daksh Aggarwal†


Introduction

Virtual currencies (‘VCs’), especially cryptocurrencies, have garnered significant investment interest in India recently. Even in the absence of any law regulating their use presently, investments in the Indian VC market are worth over $5 billion, with over 20 million active users. A significant volume of VC transactions in India are carried out through VC exchanges, such as Coin DCX, Wazir X, Unocoin, ZebPay, etc. These exchanges operate as trading platforms, whereby users make fresh VC purchases through the platform, using fiat currency (like Indian Rupees), or either bring VCs that they already own to the platform for trading.

The inability of existing laws, be it taxation, insolvency or data protection, to deal with VCs demands attention. The primary challenge to VC regulation is the uncertainty regarding their very nature – whether they can be considered goods, commodities, currencies, or property. Through this two-part series, the authors attempt to answer this question in the context of a VC exchange/trading platform undergoing a Corporate Insolvency Resolution Process (‘CIRP’) or liquidation, governed by the Insolvency and Bankruptcy Code, 2016 (‘IBC’).

In Part 1, we analyze the character of VCs, which forms the basis of analysis for their treatment in CIRP or liquidation. In Part 2, we determine whether accountholders would be treated as financial or operational creditors if the corporate debtor/VC exchange underwent CIRP or liquidation. We further study procedural difficulties such as ‘anonymity of parties’ and ‘jurisdiction of courts’ that a Resolution Professional or liquidator might face with respect to VCs. Through these two posts, the authors hope to bring clarity regarding the holdings of VC accountholders with exchanges, which is essential in the present unsettled regulatory environment in India.

Nature of VCs: Are they ‘property’?

The term ‘property’ describes a ‘proprietary relationship with a thing’, i.e. only the owner is entitled to possess, control and enjoy it to the exclusion of others.[1] During insolvency of a VC exchange, the question of who can enforce claims in VCs (accountholder or creditor) cannot be answered without determining whether VCs are property or not. Thus for VCs to be considered the subject matter of insolvency, they must first be recognised as an object of property.

In IBC, the expression ‘property’ as defined in Section 3(27) is given its widest amplitude, taking into account ‘every description of property’. The Report of the Insolvency Law Committee dated 20 February 2020 echoes this view, noting that the Section 3(27) deals with an inclusive meaning of ‘property’, a definition that encompasses every possible explanation.

In India, the status of VCs is undetermined, but not unexplored. An analysis of the nature of VCs was undertaken by the Supreme Court (‘SC’) in Internet and Mobile Association of India v. Reserve Bank of India (hereinafter, ‘IMAI’) where an RBI circularring-fencing’ VCs, i.e. advising financial entities not to deal with VC related services, was set-aside. The judgment, arising in the context of VC regulation and not insolvency or liquidation, provides a detailed review of the treatment of VCs internationally. The Court observed that the different names given to VCs, including ‘crypto assets’, crypto currencies, ‘digital assets’, electronic currency, digital currency, etc. ‘elude an exact and precise definition, making it impossible to identify them as belonging either to the category of legal tender solely or to the category of commodity/good or stock solely’ [para 3.1]. The Court held that identifying VCs as ‘commodity’ or ‘property’ or ‘non-traditional currency’ or ‘money’ may be true descriptions but ‘none of these constitute the whole truth’ [para 6.85]. The Court accepted the argument that VCs are property, but at the same time acknowledged that their character may change depending on the situation.

Since the status of VCs in India is yet to be authoritatively decided, a review of international jurisprudence in this regard is apposite. In National Provincial Bank Ltd. v. Ainsworth[2](‘Ainsworth Case’), the House of Lords laid down the litmus test for property. It was held that before classifying any interest or right as property, it 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.’ These features of ‘property’ simply indicate that property is that which is peculiar, i.e. can be easily differentiated from other types and has a concrete existence. Furthermore, the ‘unfettered control’ the owner enjoys over the property must be recognised and respected by third parties.

These standard features of property are not alien to Indian jurisprudence. In Shakti Insulated Wires Ltd. v. Joint Commissioner of Income Tax, the Income Tax Appellate Tribunal relied on Ainsworth while examining the ‘concept of ownership of property’. In IMAI, the apex court acknowledged that Ainsworth has been accepted as the locus classicus on ‘attributes of property’. Though not explicitly relied on, the Court observed that the four-pronged test has occupied a significant place in property law due to its widespread acceptance.

Courts in different jurisdictions have applied the Ainsworth tests to conclude that VCs are a form of property. One such example is B2C2 Ltd. v. Quoine Pte Ltd. (‘B2C2 1’), in which the Singapore International Commercial Court was of the view that VCs can take the shape of property as per the golden rule proposed in Ainsworth. B2C2 (the trader) sued Quoine (the VC exchange platform) for breach of contract and breach of trust. Due to algorithms designed by B2C2 and Quoine, B2C2 initiated trading Ethereum in exchange for 10 Bitcoins against the market rate of one Ethereum for 0.04 of a Bitcoin. Realising that B2C2 sold Ethereum at approximately 250 times its then market price, Quoine reversed the trades, which led to the dispute. Taking into consideration the factual matrix, the Court noted that VCs are not legal tender as they are not regulated currency issued by any government, but they ‘do have the fundamental characteristic of intangible property as being an identifiable thing of value’. In the appeal, titled Quoine Pte Ltd v. B2C2 Ltd (‘B2C2 2’), the Court of Appeal remarked that though ‘VCs are capable of assimilation into the general concepts of property’, however, it is difficult to ascertain the type of property that is involved.

Another judgment which relied on Ainsworth is AA v. Persons Unknown & Others Re Bitcoin. In this case, the IT system of an insurance company was hacked and ransom was demanded in Bitcoin to allow the company to regain access to its data. Out of 109.25 Bitcoins transferred as ransom, 96 Bitcoins were sent to a wallet linked to the cryptocurrency exchange called Bitfinex. A proprietary injunction was sought against Bitfinex over Bitcoins which represented ransom monies. Granting an interim injunction, the English High Court of Justice ruled that Bitcoin is property as it meets the requirements for property. It was made clear that it would be erroneous to accept that there are only two kinds of properties, i.e., choses in possession and choses in action. Even if cryptocurrency does not fall within the ambit of either category, it still continues to be property, more specifically a species of intangible property.

A discourse on VCs is incomplete without David Ian Ruscoe and Malcolm Russell Moore v. Cryptopia Limited (‘Cryptopia Case’), the most recent authority on the subject. Cryptopia Ltd. (cryptocurrency exchange platform) was placed into liquidation after 14% of its cryptocurrency was stolen. Two intriguing questions were raised before the High Court of New Zealand:

(i) Is cryptocurrency a kind of property?

(ii) Whether VCs held in Cryptopia belonged to the account holders or creditors?

After a detailed perusal of the cases discussed above, the Court held:

(i) VCs are property as they satisfy all the conditions outlined in Ainsworth Case [paras 103 to 119]; and

(ii) Account holders are the owners of VCs traded on Cryptopia, who held VCs on ‘trust’ for them [paras 179 and 299 (b)].

By relying on usage of phrases like ‘your coin balances’, ‘your cryptocurrency coins’ and ‘control back of their money’ in Cryptopia’s Terms and Conditions, it was concluded that Cryptopia expressed intention to create a trust where ‘account holders would be depositing, buying, selling and owning their own cryptocurrency’ [paras 27, 191 and 176-178]. Therefore, cryptocurrencies could not be identified as the company’s assets and were distributed to account holders on liquidation [para 191].

The position in India with regard to the nature of VCs is presently unsettled. The SC in IMAI clarified that VCs are property, but their precise nature is elusive since “no single definition constitutes the entire truth”. In the authors’ opinion, VCs must be treated as intangible property in the context of insolvency or liquidation. VCs exhibit the characteristics of property as they: (i) can be identified; (ii) can be traded on a platform; (iii) can be transferred; and (iv) are stable to such an extent as their history is available on blockchain technology [para 118 of Cryptopia]. VCs fulfil the 4 criteria set out in Ainsworth. Further, the scope of Section 3(27) of IBC is very broad due to the presence of the expression ‘every description’, which allows VCs to be included in the definition of property. VCs thus qualify to be property both by statute (IBC) and by common law.


In the next part, the relationship between VC accountholders and a VC exchange in CIRP and liquidation will be examined.


[1] UK Jurisdiction Taskforce, Legal Statement on Cryptoassets and Smart Contracts (2019) paras 35-36. [2] [1965] AC 1175 (HL) at 1247–1248.


†Ribhav Pande is a Judicial Law Researcher at the High Court of Delhi. Daksh Aggarwal is an advocate based in New Delhi. He read law at Campus Law Centre, Faculty of Law, University of Delhi.

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