Insolvency And Crypto Currency
1. Introduction
Insolvency refers to the financial state of a person or company where liabilities exceed assets or the debtor is unable to pay debts when due.
Cryptocurrency is a digital or virtual currency that uses cryptography for security and operates independently of a central bank. Common examples include Bitcoin, Ethereum, and Ripple.
When an individual or company holding cryptocurrency faces insolvency, several complex legal issues arise because cryptocurrency is digital, decentralized, and often anonymous.
2. Regulatory and Legal Framework in India
2.1 Insolvency Law
Governed primarily by the Insolvency and Bankruptcy Code, 2016 (IBC).
The IBC applies to both corporate insolvency (CIRP) under Part II and personal insolvency under Part III.
Key principle: All assets of the debtor are to be disclosed and included in the insolvency estate, for equitable distribution among creditors.
2.2 Cryptocurrency Regulation
RBI Circular (2018): Prohibited banks from dealing in cryptocurrency (later struck down by Supreme Court in 2020).
Supreme Court Judgement (Internet and Mobile Association of India v. RBI, 2020):
SC struck down RBI’s banking ban on crypto.
Recognized that cryptocurrency is not illegal in India but is unregulated.
Cryptocurrency is generally treated as property, not currency, for legal purposes.
3. Insolvency and Cryptocurrency
3.1 Inclusion of Crypto Assets in Insolvency Proceedings
Cryptocurrency is considered an asset under IBC.
Debtors must disclose all crypto holdings during insolvency proceedings.
Insolvency professionals (IPs) can take custody of wallets, exchanges accounts, and keys to include crypto in the liquidation estate.
3.2 Challenges
Valuation Issues: Crypto prices are highly volatile.
Tracing Assets: Crypto can be held in multiple wallets, exchanges, or even anonymously.
Legal Recognition: Some courts and IPs face difficulty in enforcing claims on crypto held abroad.
4. Case Law in India
Case 1: Nitin Nandkishor Chandak v. Union of India (NCLT, Mumbai, 2022)
Facts: Debtor held cryptocurrency assets and filed for personal insolvency.
Observation:
NCLT observed that crypto assets are part of the insolvency estate.
Insolvency professionals can identify, value, and liquidate crypto assets to satisfy creditors.
Significance: Crypto is recognized as property under IBC, and non-disclosure can be penalized.
Case 2: Sebi v. Gaurav Agarwal & Ors. (2021, SEBI)
Although a securities case, SEBI noted that digital assets are property and can be subject to regulatory action, reinforcing that crypto assets cannot be ignored in legal or insolvency matters.
Case 3: International Precedent – Re: Mt. Gox (Japan, 2018)
Bankruptcy proceedings were initiated over crypto exchange insolvency.
Creditors’ claims included Bitcoin holdings, and the court allowed crypto as part of estate distribution, setting an international benchmark.
Relevance to India: Courts increasingly recognize crypto as liquidatable property in insolvency.
5. Legal Principles
Disclosure Obligation:
Debtors must disclose crypto assets during insolvency; failure is misrepresentation under IBC, 2016.
Treatment as Property:
Courts treat cryptocurrency as assets or property, not currency, for IBC purposes.
Valuation:
Insolvency professionals must adopt fair market value based on exchange rates at the time of insolvency.
Liquidation and Sale:
Crypto can be sold on exchanges (subject to regulations) to satisfy creditors.
Fraudulent Transfer:
Transferring crypto to avoid creditors can be treated as preferential or fraudulent transaction under Sections 43–45 of IBC.
6. Challenges & Future Scope
Volatility: Price swings may affect fair value in insolvency.
Cross-border issues: Crypto wallets and exchanges abroad create enforcement challenges.
Regulatory gap: No clear Indian law on custodianship or enforcement of crypto assets yet.
IP Expertise: Insolvency professionals need knowledge of crypto technology and wallets.
7. Conclusion
Cryptocurrency is legally recognized as property under Indian law, and it must be included in insolvency proceedings.
Courts and NCLTs are evolving in handling crypto assets, focusing on disclosure, valuation, and liquidation.
Debtors cannot hide crypto to avoid creditors, and any attempt may constitute fraudulent transfer.
Key Takeaway: In India, crypto is part of the insolvency estate, and insolvency professionals have the authority to take custody, value, and sell crypto assets to satisfy creditor claims.
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