top of page
  • Ribhav Pande and Daksh Aggarwal

Decrypto-ing IBC: Virtual Currency Exchanges in Insolvency (Part 2)

-Ribhav Pande and Daksh Aggarwal†

In Part 1, we argued that VCs must be viewed as intangible property in light of IBC. The discussion was necessary to give effect to the proprietary rights of VC accountholders over their VC holdings.

In this concluding part, the authors explore the relationship between VC accountholders and a VC exchange to determine how these accountholders would recover their property when a VC exchange undergoes CIRP or liquidation. We also highlight some practical problems that the current Indian insolvency mechanism might encounter while dealing with the insolvency of a VC exchange.

Fate of VC Account Holders in CIRP

If an Indian VC exchange were to go into insolvency (‘CIRP’), it is very likely that it will face the same two conceptual challenges that arose in Cryptopia. In this section, the authors aim to address the second issue concerning the ownership rights, i.e. whether VCs should be distributed among the creditors or among account holders when the VC exchange is a corporate debtor.

IBC recognizes two classes of creditors in CIRP: financial and operational. It is clear from a bare perusal of Section 5(8) that VCs held by a VC exchange cannot constitute ‘financial debt’, primarily since there is no debt disbursed against the consideration for the time value of money between VC account holders and VC exchanges. Therefore, VC account holders are not financial creditors.

VC account holders are not operational creditors either for two reasons. First, ‘operational debt’ under Section 5(21) pertains to a claim in respect of the provision of goods or services. As elaborated above, the authors’ view VCs as ‘property’. This does not ipso facto mean that they are ‘goods’. The Sale of Goods Act, 1930 defines ‘goods’ as ‘every kind of moveable property other than actionable claims and money’. Goods are, therefore, a specific subset of ‘property’ as the definition clearly excludes any form of ‘movable property’ which partakes the nature of actionable claims and money. VCs possess a hybrid nature, inasmuch as they are movable property but also partake the nature of money, which was also taken note of by the SC in IMAI [para 6.86]. In light of this reasoning, VCs cannot be considered ‘goods’ stricto sensu, which would preclude any claim with respect to VCs as ‘operational debt’. Second, and more crucially, VCs are owned by the account holders themselves and not by the VC exchange. The ‘Terms of Use’ between VC exchanges and account holders [see Terms of Use of CoinDCX (‘About Us’ at para 1(c)), WazirX (‘User Agreement’ at para 5), Unocoin (‘Risks’ at para 1 and ‘Maintaining your Account: Our Rules’) and Zebpay (para 14(a)(12))] govern the relationship of VCs to the VC exchange and these are purely contractual arrangements. The employment of words like ‘your digital assets’, ‘your cryptocurrency assets’ and ‘lose your cryptoassets’ by the forenamed VC exchanges in their ‘Terms and Conditions of Use’ emphasize that VCs belong to account holders/ users only.

In fact, assets owned by a third party but in possession of the corporate debtor, held under contractual arrangements, are excluded from the ambit of ‘assets’ under Section 18(f) of IBC, which defines the duties of an Interim Resolution Professional. In M/s Embassy Property Developments Pvt. Ltd. v. State of Karnataka and Ors., the highest court held that, ‘an asset owned by a third party, but not in the possession of the corporate debtor under contractual arrangements, is specifically kept out of ‘assets’ under the Explanation to Section 18’ [at para 39]. Here, the term ‘contractual arrangements’ demands special attention as it gives rise to ‘right to payment’, which forms an intrinsic part of claim as defined in Section 3(6) of IBC.[1] Account holders/users/customers can submit their claims in respect of CIRP and must get what is actually owned by them. It must be noted that VC exchanges cannot ‘pay’ account holders as they are not the holders of cryptocurrencies, unlike creditors who are paid from their property in the event of insolvency.

It is worth noting that the judgment in Cryptopia held that the VCs were ‘held on trust’ by the VC trading platform. However, on a perusal of the Terms and Conditions of India’s leading VC exchanges, it is clear that even the minimum requirement of a ‘reasonable certainty’ of intent to create a trust under Section 6 of the Indian Trusts Act, 1882 is not made out. Therefore, VCs of account holders cannot be said to be held in trust by VC exchanges. The Cryptopia approach, however, is not necessary in light of the express statutory exclusion of contractual arrangements.

Keeping in mind the aforesaid, it is clear that VCs are excluded from the ambit of ‘assets’ that form the subject-matter corpus of a CIRP process. VC account holders would be excluded from the purview of CIRP and entitled to a full return of their VC holdings, as they were in the case of Cryptopia as well.

Fate of VC Account Holders in Liquidation

In the context of liquidation, either voluntary or by application, the authors opine that VCs should be excluded from the ‘liquidation estate’ from a bare reading of Section 36 of IBC. Similar to Explanation to Section 18(f), Section 36(4)(a)(iv) stipulates that ‘other contractual arrangements which do not stipulate transfer of title but only use of the assets’ shall be excluded from liquidation estate assets and shall not be used for recovery in the liquidation. The first aspect, i.e. VC account holders are owners of VCs is clear from the discussion in the previous section.

The second aspect, ‘use of the assets’, is also made out in light of the fact that VC trading platforms earn their income entirely through charging transaction fees for trading and withdrawal of VCs by account holders. Black’s Law Dictionary (9th edn.) defines ‘use’ as ‘the application or employment of something’ and specifically, ‘commercial use’ as ‘a use that is connected with or furthers an ongoing profit-making activity’. In the authors’ opinion, using VCs of account holders to provide a pool of VCs for trading and purchase/selling as well as matching trading orders, record-keeping of holdings and actual transfer between accounts for a fee constitutes ‘use’ of the VC asset without there being a corresponding ownership, thus falling squarely within Section 36(4)(a)(iv) and thereby excluding VCs from the liquidation estate.

Practical Considerations

An important issue, as flagged in Cryptopia, is that of owner traceability [para 200]. It stems from the anonymity associated with the owner of VCs and in case of insolvency, tracking the actual or corporate person who owns the VC. This issue is addressed in the Indian context, given the stringent Know-Your-Customer (‘KYC’) or other identification requirements imposed by the VC trading platforms in their Terms of Use. These safeguards are meant to prevent money laundering and other financial crimes associated with the anonymity VCs provide, but in the process, also supply an easy solution to the traceability issues that may have arisen in CIRP or liquidation.

Cross-border Insolvency (‘CI’) is another quandary that Indian courts or Adjudicating Authorities (‘AA’) may encounter. VC exchanges have users/account holders from across the globe participating in the trade, giving rise to problems related to jurisdiction. In this regard, the seminal questions are:

(i) Where should the insolvency proceedings be initiated? and

(ii) Which country’s insolvency law would be applicable?

To address these concerns, the Centre of Main Interests (‘COMI’) of a corporate debtor must be ascertained. Discovering a VC exchange’s COMI can be a complicated task because of the borderless nature of blockchain technology which cryptocurrency systems deploy. Adding to the woes, the current Indian CI mechanism is less efficient and more time-consuming as it either requires the Indian government to enter into bilateral agreements with other countries (Section 234 IBC) or AA to issue letters of request to courts of nations where assets of a corporate debtor are situated (Section 235of IBC). So far, only one verdict discusses CI, and that too without unravelling the intricacies of the law. There, the National Company Law Appellate Tribunal allowed the Dutch Administrator to participate in Indian insolvency proceedings against Jet Airways (India) Ltd. It cannot be denied that the underdeveloped state of CI jurisprudence in India poses a serious problem, which might remain unaddressed for a long time due to the absence of a comprehensive framework on the subject.


VCs are property owned by VC account holders and this ownership is immutably recorded on the public blockchain. VC account holders are neither financial nor operational creditors, and VCs are governed by contractual arrangements between the holder and exchange. Such contractual arrangements are excluded from the ambit of CIRP as well as liquidation. Thus, in case of a VC exchange’s insolvency, be it CIRP or liquidation, VC holders will be entitled to a complete return of all their VC assets held by the VC exchange.

The IMAI judgment did away with the initial brakes the government put on VCs in India. The uncertainty regarding the fate of regulation is already having financial repercussions in the VC market, especially in light of The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 which is set to be introduced in Parliament. At the end of the day, it is for the Legislature to step up and make clear its treatment of VCs. With the right regulation, India can join the world stage in positive engagement with the worldwide evolution of decentralized currency.

[1] § 101(5) of Chapter 11 US Bankruptcy Code, 1978 which deals with the definition of ‘claim’ is a replica of § 3(6) of IBC. Since Indian courts have not decoded the term ‘claim’ in Indian context, interpretation offered by US courts can be the guiding light. In Johnson v. Home State Bank, 501 U.S. 78,83 (1991), it was held that ‘congress intended…to adopt the broadest available definition of “claim”.’ In Pennsylvania Department of Public Welfare v. Davenport, 495 U.S. 552,558 (1990), it was observed that ‘right to payment’ means ‘nothing more nor less than an enforceable obligation’.

†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.

Recent Posts

See All


bottom of page