Cryptocurrency and Digital Assets in IBC Proceedings

Vikrant D. Shetty

Sep 22

11 min read

Updated: Oct 21

Cryptocurrency and Digital Assets in IBC Proceedings: An Emerging Challenge

Cryptocurrency and other virtual digital assets held by an insolvent exchange or corporate debtor fall within the liquidation estate under Section 3(27) of the Insolvency and Bankruptcy Code, 2016, which defines property broadly enough to capture them. The Madras High Court's October 2025 ruling in Rhutikumari v. Zanmai Labs treated cryptocurrency as property capable of ownership, though no ruling has yet addressed digital assets inside a corporate insolvency. Custody depends on private keys, so a resolution professional must move quickly to secure wallets before value is lost. This article examines how the Code's property, valuation and moratorium provisions apply to digital assets.

How the IBC Defines Property: Can Digital Assets Qualify?

Section 3(27) of the IBC defines 'property' expansively to include money, goods, actionable claims, land and every description of property situated in India or outside India, and includes obligations and every description of interest, whether present or future or vested or contingent, arising out of or incidental to, property. This definition is deliberately broad. Digital assets, whether Bitcoin, Ethereum, NFTs, or exchange tokens, are capable of holding value, being transferred, and being owned. The weight of emerging Indian jurisprudence supports their classification as property under Section 3(27).

The Madras High Court's 2025 judgment in Rhutikumari's case was the first Indian court pronouncement expressly recognising cryptocurrency as property under Indian law. While delivered in a different statutory context, the reasoning is directly relevant to how the NCLT should treat digital assets when they appear in the books or wallet holdings of a corporate debtor. The recognition of digital assets as property has significant downstream consequences: it means they form part of the liquidation estate, can be the subject of security interests, and must be valued and distributed through the Section 53 waterfall.

Digital Assets in the Liquidation Estate: Identification and Custody Challenges

The greatest practical challenge in digital asset insolvencies is not classification, it is identification and custody. Unlike bank balances or physical assets, digital assets are held in wallets accessed through private cryptographic keys. If the corporate debtor's private keys are lost, compromised, or held by former management who are uncooperative, the Resolution Professional or Liquidator may have no legal mechanism to compel access under existing Indian law.

The IBC provides the Adjudicating Authority with power under Section 19 to order directors and other officers to cooperate with the RP, and under Section 299 (in liquidation) to order the production of documents and information. Courts have extended similar orders to compel disclosure of wallet addresses and private keys. However, enforcement is a different matter, a former promoter who refuses to disclose keys and has moved assets to cold wallets or overseas exchanges creates an enforcement vacuum that Section 19 orders alone cannot bridge.

Valuation of Virtual Digital Assets in CIRP

Regulation 35 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 requires the RP to appoint registered valuers to determine the fair value and liquidation value of the assets of the corporate debtor. Registered valuers under the Companies Act, 2013 currently operate under three asset classes: securities or financial assets, land and building, and plant and machinery. Digital assets fit none of these categories cleanly.

The IBBI has not yet issued a specific registered valuer framework for virtual digital assets. In practice, RPs have engaged cryptocurrency analytics firms and forensic accountants with blockchain expertise to produce valuation reports, submitting these to the CoC alongside formal registered valuer reports on other asset classes. Courts have generally accepted these arrangements given the absence of a prescribed methodology, but the lack of regulatory clarity creates risks, particularly when asset prices are volatile and valuation disputes arise between the RP, the CoC, and resolution applicants.

User Assets Held on Exchange: Are They Part of the Liquidation Estate?

One of the most contested questions in crypto exchange insolvencies is whether user assets held on the exchange, deposited by customers for trading, form part of the liquidation estate or are held on trust outside it. Section 36(4)(b) of the IBC excludes assets held in trust for third parties from the liquidation estate. If user cryptocurrency deposits are characterised as trust assets, they must be returned to users ahead of any creditor distribution.

The trust characterisation depends critically on the terms and conditions of the exchange platform, the way assets were commingled with exchange assets, and whether the exchange maintained segregated client wallets. Exchanges that commingled user assets with proprietary assets, which was common practice, weaken the trust argument. This is a live issue in the WazirX proceedings and is expected to reach Indian courts as domestic exchange insolvencies unfold.

Are VDA Service Providers Reporting Entities Under the PMLA?

Since March 2023, Virtual Digital Asset Service Providers (VDA SPs), which includes crypto exchanges, have been designated as 'reporting entities' under the Prevention of Money Laundering Act, 2002 (PMLA). This means they are obligated to maintain KYC records, file suspicious transaction reports, and cooperate with the Enforcement Directorate. When a VDA SP enters insolvency, PMLA obligations do not disappear.

For resolution professionals, this creates a complex compliance obligation during the CIRP. The RP must continue to comply with PMLA reporting requirements for the corporate debtor, while also managing the insolvency process. Any ED attachment of crypto exchange assets during the CIRP will trigger the moratorium under Section 14 of the IBC, and the Supreme Court's clean slate jurisprudence under Section 32A may protect a successful resolution applicant from post-plan criminal proceedings, as confirmed in Ghanashyam Mishra and Sons Private Limited v. Edelweiss Asset Reconstruction Company Limited (2021).

Comparison: Key Issues in Digital Asset Insolvency vs. Conventional Insolvency

The following comparison illustrates where the IBC framework creates gaps in digital asset insolvency contexts:

How Does the IBC's Value Maximisation Objective Apply to Digital Assets?

The place of cryptocurrency and other digital assets in insolvency begins with the object of the Code, which the Supreme Court described in Swiss Ribbons (P) Ltd. v. Union of India [(2019) 4 SCC 17] as the revival of the corporate debtor and the maximisation of the value of its assets for all stakeholders. If a corporate debtor holds cryptocurrency, tokens, or other digital assets that have value, those assets are in principle part of what the resolution professional must identify, secure, and bring to account for the benefit of creditors, just as with any other property of the debtor. The novelty lies not in whether such assets count, but in the practical and legal challenges of dealing with a new and volatile asset class within an insolvency framework built for conventional assets.

Custody, Keys, and Valuation Challenges

Digital assets pose distinctive practical problems for an insolvency professional. Control of cryptocurrency depends on private keys, and without them the asset may be irrecoverable, so the resolution professional must move quickly to identify wallets and secure access, often needing specialist assistance. Valuation is difficult because prices are volatile and markets fragmented, which complicates both the estimation of the estate and any sale. Custody raises questions of safe storage and the risk of theft or loss during the process. These are not reasons to ignore digital assets but reasons to handle them with particular care, and a professional who discovers that a debtor holds such assets should treat their identification and security as an early priority.

What Duties Does Regulatory Uncertainty Place on a Resolution Professional?

The legal and regulatory treatment of digital assets in India has been evolving, and uncertainty about their classification, taxation, and the permissibility of dealings adds a further layer of complexity to their treatment in insolvency. A resolution professional must navigate this uncertainty while discharging the core duty to preserve and maximise the value of the estate, taking advice on the lawful means of holding and realising such assets and documenting the steps taken. Creditors, for their part, should be alert to the possibility that a distressed debtor holds digital assets that are easily overlooked or concealed, and should raise the question early. As the asset class matures and the law settles, the handling of digital assets in insolvency is likely to become more routine, but for now it demands caution and expertise.

Frequently Asked Questions

Are cryptocurrencies property under the IBC?

The IBC's definition of property in Section 3(27) is expansively worded and is capable of encompassing digital assets. The Madras High Court's 2025 judgment in Rhutikumari's case was the first Indian court ruling expressly recognising cryptocurrency as property under Indian law. Subject to the specific facts of each case, digital assets held by a corporate debtor are likely to form part of the liquidation estate.

What happens to user funds held on a crypto exchange that enters CIRP?

Whether user funds form part of the liquidation estate depends on whether they were held on trust or were commingled with the exchange's proprietary assets. If segregated and held on trust, Section 36(4)(b) of the IBC excludes them from the liquidation estate. If commingled, users become unsecured creditors and share in the waterfall distribution. The terms and conditions of the exchange platform and actual wallet segregation practices are the key determinants.

How are digital assets valued during a CIRP?

There is no IBBI-prescribed methodology for valuing virtual digital assets. RPs have engaged cryptocurrency analytics firms and forensic accountants with blockchain expertise to produce valuation reports alongside standard registered valuer reports for other assets. The volatility of digital asset prices adds complexity, and valuation dates matter significantly given the price swings common in crypto markets.

Does the CIRP moratorium apply to ED attachments of crypto assets?

Yes. The moratorium under Section 14 of the IBC stays all proceedings against the corporate debtor, including attachment actions by the Enforcement Directorate under the PMLA. The Bombay High Court has also held that the immunity under Section 32A of the IBC prevails over pre-resolution PMLA attachments once a resolution plan resulting in a change of management is approved. The RP must assert these protections proactively in any ED proceedings.

Does India have a specialised framework for crypto exchange insolvency?

No. As of 2026, India does not have a specialised insolvency or resolution framework for digital asset firms. VDA SPs are subject to the standard IBC framework applicable to all corporate entities. Legal commentators and industry bodies have called for NCLT benches with technical expertise in blockchain, specialised registered valuer categories for digital assets, and specific provisions for user asset segregation and recovery, but legislative action on these points is pending.

Which forum has jurisdiction over disputes involving cryptocurrency assets in insolvency?

The National Company Law Tribunal has jurisdiction over all matters arising in or relating to the corporate insolvency resolution process, including disputes over whether cryptocurrency or other digital assets form part of a corporate debtor's estate, under Section 60 of the Insolvency and Bankruptcy Code, 2016. Where a dispute also involves anti-money laundering enforcement, such as an attachment by the Enforcement Directorate, the resolution professional may need to engage separately with the adjudicating authority under the Prevention of Money Laundering Act, 2002. The Tribunal's jurisdiction extends to determining whether a claimed digital asset belongs in the liquidation estate at all.

Can a resolution professional sell cryptocurrency before a resolution plan is approved?

A resolution professional may realise fast-depreciating or highly volatile assets, including cryptocurrency, with the approval of the committee of creditors even before a resolution plan is approved, in order to preserve value for the estate. Given the price volatility of virtual digital assets, resolution professionals often seek early committee approval to convert holdings into fiat currency rather than wait for the resolution plan to be finalised. Any such sale must be transparently valued and reported to the committee, since an unauthorised or poorly documented sale can expose the resolution professional to personal liability.

What happens to staking rewards or airdrops earned on crypto assets after CIRP begins?

Staking rewards, lending interest and new tokens received through an airdrop on digital assets forming part of the corporate debtor's estate accrue to the liquidation estate in the same way that dividends or interest on conventional investments would. The resolution professional is responsible for identifying and claiming such accretions, since they add to the pool available for creditors. In practice, tracking these accretions is a common gap in digital asset insolvencies because few resolution professionals have the blockchain expertise to monitor wallet activity continuously.

Are non-fungible tokens treated the same way as cryptocurrency under the IBC?

Non-fungible tokens fall within the same broad category of virtual digital assets as cryptocurrency, and the same property analysis under Section 3(27) of the Insolvency and Bankruptcy Code, 2016 should apply to them. Non-fungible tokens raise a distinct valuation problem because each token is unique rather than fungible, so a registered valuer cannot rely on an active market price the way they might for a widely traded cryptocurrency. No Indian court has yet ruled specifically on non-fungible tokens in a corporate insolvency.

Can a secured creditor claim priority over cryptocurrency assets in liquidation?

A creditor holding a security interest over specific cryptocurrency, properly created and perfected before insolvency, can assert that interest during liquidation under Section 52 of the Insolvency and Bankruptcy Code, 2016, on the same footing as a security interest over any other asset. In practice, security interests over cryptocurrency remain rare in India because the assets are not amenable to the registration mechanisms used for conventional collateral such as land or plant and machinery. Most cryptocurrency in a liquidation estate is therefore distributed through the ordinary waterfall in Section 53.

What should a resolution professional do first on taking charge of an entity holding cryptocurrency?

The immediate priority on taking charge of an entity holding digital assets is to secure the private keys and wallet access before any other stakeholder can move the assets, since control of a cryptocurrency wallet is effectively control of the asset itself. This typically means changing multi-signature permissions, transferring holdings to a wallet under the resolution professional's exclusive control, and documenting the transfer with blockchain transaction records. Delay carries a real risk of irreversible loss if a former officer or a third party retains access.

How are gains from selling cryptocurrency during liquidation taxed?

Gains from the transfer of virtual digital assets are taxed at a flat rate of thirty per cent under Section 115BBH of the Income-tax Act, 1961, effective from April 2022, and no deduction is allowed other than the cost of acquisition. A resolution professional who liquidates cryptocurrency holdings during the corporate insolvency resolution process must factor this fixed rate and the bar on set-off against other losses into the estate's realisable value, since it differs materially from the tax treatment applied to other capital assets.

How does the moratorium under Section 14 of the IBC affect crypto asset recovery litigation?

The moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 bars the institution or continuation of suits and proceedings against the corporate debtor once the corporate insolvency resolution process begins, and this extends to civil recovery actions concerning cryptocurrency the corporate debtor holds or controls. A creditor cannot separately sue to recover specific crypto assets during the moratorium and must instead file a claim with the resolution professional. The moratorium does not, however, bar independent criminal or enforcement proceedings, which fall outside its scope.

What records should an exchange maintain to keep customer crypto assets out of the liquidation estate?

An exchange should maintain segregated, per-customer wallet records or ledger entries that clearly attribute specific holdings to specific customers, together with the terms of service under which the assets were deposited, to support a trust claim that keeps those assets outside the liquidation estate under Section 36(4)(b) of the Insolvency and Bankruptcy Code, 2016. An exchange that commingles customer assets in pooled wallets without such records makes it far harder for a resolution professional or a court to distinguish customer property from the exchange's own assets.