Navigating the Dilemma Surrounding treatment of Cryptocurrency under the current

insolvency regime

FTX tokens recently declaring bankruptcy 1,, raised several questions regarding the capability

of current insolvency regime.2 The layer of anonymity added by blockchains, combined with

the decentralized storage of Crypto-assets and storage in encrypted wallets makes it difficult

for the resolution process to take effect. these problems originate from the fact that the

issuance of blockchain securities is creating a divide between the world where securities are

issued, offered and sold, and the world where law is enforceable.3

The recent interest of enterprises to invest in crypto-assets makes it important that this

problem is tackled. Presently, the global cryptocurrency market stands around $2.18 Trillion. 4

In the United States, the number of Security and Exchange Commission (SEC) enforcement

actions related to Crypto-assets has steadily increased over the last decade, from a total of 11

between 2012 and 2017 to 128 between 2018 and 2023.5 this further highlights the need of

regulations of crypto-assets and its interplay with insolvency. Moreover, an

acknowledgement on the agenda of the G20 stating that crypto needs comprehensive policies

to protect economies and investors further highlights the needs of such an analysis.6
1
https://www.theguardian.com/business/article/2024/may/08/bankrupt-crypto-exchange-ftx-says-it-will-
be-able-to-repay-creditors
2 https://www.tcclr.com/post/interplay-of-insolvency-and-the-
cryptocurrency-industry-in-india#:~:text=This%20event%20highlights%20the%20complex,nuanced
%20understanding%20of%20cryptocurrency%20insolvency.
3 ohd Javaid, Abid Haleem, Ravi Pratap Singh, Rajiv Suman, Shahbaz
Khan,
A review of Blockchain Technology applications for financial services,
BenchCouncil Transactions on Benchmarks, Standards and Evaluations,
Volume 2, Issue 3,
2022,
100073,
ISSN 2772-4859,

4 ‘Cryptocurrency Prices Today By Market Cap, FORBES’ (Forbes)

<https://www.forbes.com/digital-assets/crypto-prices/#:~:text=The%20global%20cryptocurrency
%20market%20cap,in%20the%20last%2024%20hours> accessed 17 August 2024.
5 https://angle.ankura.com/post/102j5sp/crypto-asset-investigations-
key-considerations-and-pitfalls#_edn1

6 https://www.imf.org/en/Blogs/Articles/2023/07/18/crypto-needs-
To do this the policymakers must first makes efforts to classify whether Crypto-assets should

be deemed to be property, and that too of what kind. The underwritten piece is an attempt of

authors to do the same.

Classification of Crypto-assets for the purpose of resolution process

A dilemma that needs consideration here is, as to whether the Crypto-assets can be classified

as property within the ambit of Section 3(27) of the Insolvency and Bankruptcy Code (IBC)

2016. This classification of Crypto-assets will have significant ramifications on its valuation

and recovery during the liquidation proceedings.

Therefore, it becomes imperative to address the general lack of regulatory framework to deal

with such situations.7 The Indian legal landscape does not have jurisprudence in this regard.

Therefore, we would also resort to the legal approaches adopted by other common law

countries to address this question.

Jurisprudence in Common Law Countries:

It is important to note that a crypto-asset cannot be considered a mere piece of information or

data that is stored over a blockchain ledger. 8 This happens because Firstly, the objective of

cryptocurrency is to act like an object of tradeable value and not merely to impart knowledge

or information. Moreover, it is exclusive in nature due to its combination of data records.

Secondly, the existence of a unique relation via blockchain technology ensures that the

ownership and transfer of crypto coins are securely transferred and managed similar to how

equity law provides a framework for transferring contractual rights. Thirdly, each crypto coin

is represented by a unique public key in the blockchain system which cannot be duplicated.

Moreover, the private key associated with it ensures that access and transfer of such coins

comprehensive-policies-to-protect-economies-and-investors
7 Tangri A and Sinha A, ‘Crypto-assets and Insolvency’ (IBC Laws, 18
February 2023) <https://ibclaw.in/crypto-assets-and-insolvency-by-alokita-tangri-and-akshat-
sinha/> accessed 17 August 2024.
8 Ruscoe v Cryptopia Ltd (in liq) [2020] 2 NZLR 809.
cannot be done without the consent of the owner.

Recently, the Singapore High Court9 held that each Non-Fungible Tokens (NFTs) minted on

the Ethereum blockchain within the BAYC collection could be deemed to be property. The

court did so by granting propriety injunction in favour of the claimant in this case. Here, it

must be noted that NFTs are subset of Crypto-assets 10 and work on the similar technological

framework as crypto currencies. This precedent can be effectively considered while deciding

whether cryptocurrencies like Bitcoins or Ethereum could be classified as property or not.

The dust in this matter can be finally deemed to settled by the decision of the courts of

England11 which have classified Crypto-assets as property in terms of the English Law. In this

case, the court had granted proprietary injunction against the defendants, thereby freezing the

bitcoins located in a wallet address held by a crypto-currency exchange.

This precedent becomes important primarily due to two reasons. Firstly, Justice Bryan, who

heard the case endorsed the view that was propounded the by UK Jurisdictional Taskforce in

2019 which declared that Crypto-assets to be regarded as property under the ambit of English

Law.12 Secondly, he diverged from the traditional notion of classification of property as

“choses in possession and choses in kind” under the English law and held that Crypto-assets

do not fall into either of the categories, but that does not prevent them from being treated as

property. The major rationale behind such classification was that crypto-assets satisfied the

four-pronged parameter that was laid down by the House of Lords in the Ainsworth case 13.

These parameters are generally used in common law jurisdictions for the classification of any

right or interest as property. These include:

9 Janesh s/o Rajkumar v Unknown Person

(“CHEFPIERRE”) [2022] SGHC 264.
10 Ibid.
11 AA v Persons Unknown [2019] EWHC 3556 (Comm).
12 UK Jurisdiction Task Force, Legal statement on cryptoassets
and smart contracts, (The Law Tech Delivery Panel, 2019).
13 National Provincial Bank Ltd v Ainsworth [1965] AC 1175.
 a. Satisfaction of the definition of property rights: This implies that the asset should

be capable of being isolated from other assets, whether of the same type or different

types, and therefore identifiable. In case of cryptocurrencies, the encoded

information allocated in the network is central to it and can be easily assigned to an

account holder. This helps in differentiation/isolation of assets.

b. Owner of the asset must be capable of recognition by third parties: This implies

that the owner shall have the right to control any asset and exclude others from said

control. This excludability in case of crypto is achieved with the help of private key

which ensures that without the consent of the owner, the assets cannot be dealt with.

c. Capability of assumption by third parties: This basically implies that third parties

must adhere to the rights of the owner in their asset and the asset must be potentially

desirable. The built of the blockchain technology ensures that cryptocurrencies are

subject of trading in an active market where the rights of the owner are respected.

d. Degree of permanence and stability: This implies that cryptocurrencies have

permanence and stability which majorly exists in the form of ledger entries over the

blockchain.

This aforesaid criterion has also been upheld the Singapore International Commercial Court 14,

whereby it said that Virtual Currencies can take the shape of property and possess

fundamental characteristic of intangible property as being an identifiable thing of value.

Jurisprudence in India:

Section 3(27) of the IBC 2016 lists down an inclusive definition of the term “property”,

covering a wide range of tangible and intangible assets and interests under an umbrella term.

This definition has also been considered as one of the broadest for property in the report of

the Insolvency Law Committee.15 The usage of the phrase “Every description of property” in

14 B2C2 Ltd v Quoine Pte Ltd [2019] SGHC(l) 3.

15 Ministry of Corporate Affairs, Government of India (Report of the Insolvency
this definition would clearly include Crypto within the description of a property as it can be

classified as digital asset given its value and ability to be stored and transferred via

distributed ledger. The Supreme Court in the case of Tata Consultancy Services16 mentioned

a set of attributes that are required to check listed for classification as a good. It is noteworthy

to mention that Crypto-assets such as cryptocurrency satisfy this criterion. This includes: 17

a. Existence of Utility: Crypto-assets are blockchain based assets that possess certain

economic value and acts as a medium of exchange and value storage.

b. Capable of being brought and sold: Crypto-assets can be traded via cryptocurrency

markets which are decentralised in nature and brought and sold via exchanges and

stored in wallets.

c. Capable of being transmitted, transferred, delivered, stored and possessed: As

discussed above, these attributes are also fulfilled by Crypto-assets by the medium of

a blockchain ledger. These can subsequently be accessed by the individual who

possesses the private key for it.

Therefore, it can be said that Crypto-assets can be classified as goods for legal purposes.

Now, since the definition of property under Section 3(27) of IBC includes ‘goods’, this again

provides a strong context for classifying crypto as property for the purposes of liquidation

proceedings.

Furthermore, the Supreme Court18 in the IMAI case had acknowledged virtual currencies to

belong to the category of property. However, it also remarked that its nature may change

Law Committee) <https://www.mca.gov.in/Ministry/pdf/ICLReport_05032020.pdf> accessed 17

August 2024.
16 Tata Consultancy Services v State of Andhra Pradesh (2004)
271 ITR 401.
17 Verma PP, ‘The Legality of Crypto-Currency and Its Repercussions on the
Crypto-Currency Exchanges in India’ (Mondaq, 2 May 2018)
<https://www.mondaq.com/india/fin-tech/697982/the-legality-of-crypto-currency-and-its-
repercussions-on-the-crypto-currency-exchanges-in-india#:~:text=A%20large%20number
%20of%20people%20have%20made%20investments> accessed 17 August 2024.
18 Internet & Mobile Assn of India v RBI (2020) 10 SCC 274.
depending on the context and statute involved.

Therefore, once Crypto-assets have been classified as property under Section 3(27) of IBC, it

can be considered asset of the corporate debtor for the purposes of liquidation proceedings.

When the Corporate Insolvency Resolution Process (CIRP) is initiated, the resolution

professional, who is appointed by the Adjudicating Authority would be able to take control

and custody of intangible assets19 of the Corporate Debtor. These intangible assets would now

then also include the Crypto currencies which can be managed for the purposes of

restructuring procedure.

19 The Insolvency and Bankruptcy Code 2016, s18(f)(iv).