Virtual Digital Assets (VDAs) are cryptographic representations of value such as
cryptocurrencies and non-fungible tokens (NFTs) that can be traded, transferred or used for
payment electronically, excluding traditional fiat currencies. The Indian legal regime has
recognized crypto assets as “virtual digital assets” only for the limited purposes of taxation and
anti-money laundering activities. In India, they are subject to a 30% of income tax and 1 %
TDS on transfers, with no set-off for losses. By the Indian laws, Virtual Digital Assets are
defined under Section 2(47A)1 of Income Tax Act, 1956 only and no other Indian law is very
familiar to this term currently. As the world is rapidly moving towards digital currency, there
is an instant need to adopt various laws in India too for the purpose of security of stakeholders
and service providers and to deal with various cybercrimes. Cryptocurrencies, characterized by
their decentralized and digital nature, have emerged as a significant innovation in global
finance. Henceforth, there is a need to adapt the Insolvency and Bankruptcy Code, 2016 (IBC)
to address insolvency proceedings involving crypto platforms. It is contended that crypto assets implicitly qualify as “property” under Section 3(27)2 of IBC and that is why it is essential to
safeguard the rights of crypto exchange users in the event of insolvency.
The loss of crypto assets following the hack of Indian crypto exchange WazirX, remains an
evolving legal controversy, with Indian courts continuing to struggle with the complexities of
disputes involving crypto assets. In the year 2022, there was a sharp decline in the crypto prices
and witnessed a sharp fall of several crypto platforms like Celsius, Voyager, Genesis, BlockFi,
etc. India does not have a specific regulator overseeing crypto trading. Nevertheless, its
adoption for crypto has ranked first in Global Crypto Adoption Index, 2024.3 Analysing the
growing demand, various crypto exchanges, also known as VDA service providers (VDA SPs)
have started working in India. WazirX, a major Indian VDA SP trapped into a cyber-attack in
2024, got into the losses of $230 million user assets. Instead of this cyber-attack, Indian courts
were unable to provide any relief to the affected users. Therefore, there is a need to adapt the
IBC to accommodate the potential insolvencies of VDA SPs.
In 2013, RBI advised the users of virtual currencies about the risks involved by the RBI 2013
Guidance. 4 The risks involved are such as cybersecurity risk, lack of consumer protection, price
volatility, legal and financial uncertainty and illicit use risk. By the 2017 RBI press release,
RBI again cautioned that it has not yet validated any entity to operate schemes or deal with any
virtual currencies and if any user is doing so, then he is doing it on his own risk.5 In 2018, RBI
released a Prohibition Circular6 to prohibit or ban any entity regulated by the RBI, like banks,
to provide any service to individuals or business entities which govern in virtual currencies. As
a result, an Indian investor could not purchase or transfer his investments in virtual currencies
by using a bank account.
In the case of Internet and Mobile Association of India v. Reserve Bank of India (IMAI case)
the VDA SPs challenged the RBI Prohibition Circular on the ground of violation of Article 19
(1)(g) of the Indian Constitution.7 The Supreme Court noted that RBI intended to restrict VC
trading to ensure consumer protection, prevention of violation of money laundering laws,
safeguarding the existing credit system from being polluted. But, the Supreme Court also found
that RBI has no evidence that the activities of VC exchanges have actually impacted adversely.
By the Inter-Ministerial Committee,8 it was found in 2017, that it would be an extreme step to
ban VCs as the same object of protection can be achieved by the regulatory measures.
Henceforth, the Supreme Court set aside the RBI Prohibition Circular and that is how IMAI
case marked an important role in the development of crypto exchanges in India.
On March 24, 2021, the Schedule III of Companies Act, 2013 was amended by the Ministry of
Corporate Affairs to make the disclosures by companies mandatory regarding VC in a financial
year.9 As of today, the Companies Act, 2013 does not provide for a definition of virtual
currency and cryptocurrency.
On April 28, 2022, the national agency for cyber security in India, the Indian Computer
Emergency Response Team (Cert-In) issued guidance for virtual asset service providers and
virtual asset exchange providers to maintain all information obtained through KYC and records
of financial transactions for a 5 years period. This is also applicable on a foreign service
provider who offers services to users in India.
In 2023, the Ministry of Finance notified that all VDA SPs would be required to register
themselves with Financial Intelligence Unit- India (FIU-IND) and all Indian service providers
engaged in VDA activities will come under the ambit of Prevention of Money Laundering Act,
2002 (PMLA). All the necessary information related to due diligence, record keeping, training
of employees, filing of suspicious transaction reports will be governed with FIU-IND. FIU-IND has also imposed heavy penalties on those service providers who are not registered and
blocked their URLs who provide their services to Indian users without registration or compliance with PMLA.10.
The IBC now must evolve to provide clarity to the stakeholders, resolution professionals and
corporate persons as companies are increasingly holding tokens, cryptocurrencies and
blockchain based instruments. Indian insolvency framework cannot anymore afford to be silent
on digital assets or virtual currencies. Section 3(27) of IBC still fails to mention explicitly about
digital assets under the definition of “property”. An amendment to insert the provision for
digital assets under Insolvency Code would clear the ambiguity and prevent debtors from
misusing the interpretations. The use of such assets has grown so as to the level that companies
and startups are holding these assets as part of their business models or tools for raising capital
on their balance sheets.
This regime would require securing custody of tokens and their private keys during resolution
proceedings and for that purpose, resolution professionals must get trained. The Insolvency
and Bankruptcy Board of India (IBBI) must issue guidelines for appointment of licensed
custodians, liquidation mechanism and to ensure effective realisation of assets.
The RBI, SEBI and Finance Ministry has raised concerns about securitisation of public interest
and for safeguarding their accounts. The harmonisation among all is necessary for preservation
and development of digital assets framework in India and work upon the jurisdictional part to
deal with VC. Other jurisdictions such as US, UK, Singapore, etc. have already started taking
tangible steps. They have developed provisions for treating crypto as property and to deal with
fraudulent transfers, set standards for exchanges and custodians and allow insolvency
administrators to recover it.
Nonetheless, digital assets are borderless, but insolvency laws remain jurisdiction bound. By
the proposal for UNCITRAL Model Law on Cross-Border Insolvency, digital assets must get
place to be covered explicitly under the legislation of Indian insolvency framework. This will
help in tracing the volatility of digital assets, freezing them and realising coins or tokens held
in different States. The efforts for cross-border recovery would remain ineffective without this
implementation.
In India also, digital assets are playing crucial role in investments, corporate treasures and
payment systems. They are no longer a secondary vision. If IBC is continuing to remain silent
even after the exponential growth and interest of people towards digital assets system, it will
develop a risk to lag behind in the growing market. The resolution professionals and creditors
would face this risk of being left behind without any security tools to deal with these assets.
The Indian laws of insolvency would not get importance globally and would face a decline in
the insolvency framework abroad. The alignment with cross-border adaptability, regulating
existing laws, issuing guidelines and providing statutory recognition will safeguard financial
stability and enhance investor’s confidence in the insolvency regime.
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1. the term “Virtual Digital Asset (VDA)” means,-
(a) any information or code or number or token (not being Indian currency or foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value, or functions as a store of value or a unit of account including its use in any financial transaction or investment, but not limited to investment scheme; and can be transferred, stored or traded electronically;
(b) a non-fungible token or any other token of similar nature, by whatever name called;
(c) any other digital asset, as the Central Government may, by notification in the Official Gazette specify: Provided that the Central Government may, by notification in the Official Gazette, exclude any digital asset from the definition of virtual digital asset subject to such conditions as may be specified therein. Explanation: For the purposes of this clause,-
(a) “non-fungible token” means such digital asset as the Central Government may, by notification in the Official Gazette, specify;
(b) the expressions “currency”, “foreign currency” and “Indian currency” shall have the same meanings as respectively assigned to them in clauses (h), (m) and (q) of section 2 of the Foreign Exchange Management Act, 1999 (42 of 1999).
2 "property" includes money, goods, actionable claims, land and every description of property situated in India or outside India and every description of interest including present or future or vested or contingent interest arising out of, or incidental to, property.
3 https://www.chainalysis.com/blog/2024-global-crypto-adoption-index
4 RBI in its Financial Stability Report (2013), defined virtual currencies as “a type of unregulated, digital money, which is issued and usually controlled by its developers, and used and accepted among themembers of a specific virtual community”. See, FINANCIAL STABILITY REPORT ISSUE NO. 7 (2013),
5 Press Release, RBI cautions users of Virtual Currencies, 2016-17/2054 (Feb. 1, 2017),
https://www.rbi.org.in/commonperson/English/Scripts/PressReleases.aspx?Id=2152.
6 Reserve Bank of India, Prohibition on dealing in Virtual Currencies (VCs), RBI/2017-18/154 (Notified on Apr. 6, 2018) https://www.rbi.org.in/Commonman/English/Scripts/Notification.aspx?Id=2632.
7 All the citizens shall have the right to practice any profession, or to carry on any occupation, trade or business.
8 The final report of the Inter-ministerial committee dated February 28, 2019 departed from its initial view, and recommended banning and criminalizing any cryptocurrency related activity (See, REPORT OF THE COMMITTEE TO PROPOSE SPECIFIC ACTIONS TO BE TAKEN IN RELATION TO VIRTUAL CURRENCIES (2019), https://dea.gov.in/sites/default/files/Approved%20and%20Signed%20Report%20and%20Bill%20of%20IM.
9 Press Release, MCA amends Schedule III of Companies Act on disclosure norms in financial statements (Aug. 10, 2021), https://www.pib.gov.in/PressReleasePage.aspx?PRID=1744542®=3&lang=2#:~:text=In%20order%20to%2 0bring%20in,companies%20in%20their%20financial%20statements.
10 Press Release, Financial Intelligence Unit India (FIU IND) issues compliance Show Cause Notices to nine offshore Virtual Digital Assets Service Providers (VDA SPs) (Dec. 28, 2023),
https://www.pib.gov.in/www.pib.gov.in/Pressreleaseshare.aspx?PRID=1991372