Indian insolvency laws not equipped to deal with bankruptcy of digital assets exchanges, investors
As digital assets or cryptos progressively gain popularity and usage, it is imperative to comprehend the potential implications of insolvency and bankruptcy on crypto assets and their holders.
Anita Shah Akella, who is an ex-officio Member in the governing Board of IBBI and a joint secretary in Ministry of Corporate Affairs, has shared her views on applicability of India’s insolvency laws in case a digital asset exchange or a custodian holding digital assets becomes insolvent.
She says that there is no specific law governing the insolvency of digital currency in India, and the existing insolvency laws may not be fully equipped to handle the unique characteristics of digital currency. However, the Insolvency and Bankruptcy Code, 2016 (IBC/Code) may apply to crypto exchanges as it covers ‘property’ of the insolvent entity, which could include digital assets.
In case of insolvency, the customers of the exchange may be treated as ‘financial creditors’ (FCs) or ‘operational creditors’ (OCs) under the IBC, depending on the nature of their claims.
Challenges for Insolvency Professionals
Insolvency Professionals (IPs) face various challenges while managing restructuring operations involving digital assets, including:
- Identifying and valuing such assets: Crypto assets are often stored in private wallets, and their values can fluctuate rapidly. This makes it difficult for IPs to identify and value these assets.
- Seizing custody of digital assets: Even if the IP can identify a debtor’s digital assets, it may be difficult to seize custody of those assets, especially if they are stored in a cold wallet or a decentralized wallet.
- Repatriating such assets from overseas exchanges: If a debtor’s digital assets are held on an overseas exchange, the IP may need to obtain enforcement orders from multiple jurisdictions in order to repatriate those assets.
- Liquidating such assets: Given the volatile nature of crypto assets, it can be difficult to liquidate a large part of digital assets in one go or in a short time without affecting the price of the concerned cryptocurrency.
What to Expect in the Future
The Indian government is currently working on a regulatory framework for cryptos. This framework is likely to include provisions for the insolvency of such assets. In the meantime, IPs will need to rely on their creativity and expertise to deal with the challenges of such insolvency cases.
