- 19-Apr-2025
- Healthcare and Medical Malpractice
Digital assets, including cryptocurrencies and other blockchain-based assets, are increasingly becoming part of the financial ecosystem. However, the treatment of such assets during insolvency proceedings under the Insolvency and Bankruptcy Code (IBC) has posed certain challenges due to their unique nature. Digital assets are often not recognized as traditional assets, and their volatility, ease of transfer, and anonymity raise concerns for regulators and insolvency professionals.
Digital assets such as cryptocurrencies do not have a clear legal recognition in India, as the Reserve Bank of India (RBI) has, in the past, issued circulars to restrict banking services related to cryptocurrencies. However, the Supreme Court in 2020 struck down this restriction, allowing businesses to conduct operations involving cryptocurrencies.
Despite this, the IBC does not explicitly mention cryptocurrencies or digital assets in its provisions, leading to ambiguities regarding their treatment during Corporate Insolvency Resolution Process (CIRP) or liquidation.
In the absence of specific provisions in IBC, digital assets are generally classified as property for the purposes of insolvency proceedings, much like tangible assets. The Insolvency Professional (IP) or Resolution Professional (RP) overseeing the process would likely consider cryptocurrencies or digital assets as part of the company’s assets to be managed, secured, and liquidated.
Digital assets will need to be valued, and their ownership and transferability issues will be carefully scrutinized, considering the lack of direct regulation in the country’s legal framework.
If a company holds digital assets, such as cryptocurrencies or tokens, the Resolution Professional (RP) will include these assets in the list of assets to be identified, valued, and managed as part of the resolution process.
The RP will need to ensure that the digital assets are secured or recovered, just like any other asset, and the process will involve verifying ownership, ensuring the company’s private keys or access credentials to the cryptocurrency wallet are safeguarded, and determining if the digital asset can be used in the resolution plan.
If the company holds cryptocurrencies or digital tokens as tradeable assets, the RP will consider whether these can be sold or exchanged for cash to maximize the recovery for creditors.
During liquidation, digital assets, including cryptocurrencies, may be sold or transferred in accordance with the liquidation provisions of the IBC.
The liquidator will be responsible for ensuring that the digital assets are appropriately valued and that their sale is conducted efficiently. This process might involve seeking professional advice from blockchain or cryptocurrency experts to properly handle the sale or liquidation of these assets.
The value of these assets will be determined at the time of liquidation, considering their market price, the volatility of cryptocurrencies, and the regulatory environment.
One of the key challenges in dealing with digital assets is their valuation and transferability. Cryptocurrencies are highly volatile, and their value can change rapidly, making it difficult to determine an accurate value for the company’s holdings during insolvency proceedings.
The private key of a cryptocurrency wallet is crucial to accessing and transferring digital assets. If the company’s management or directors did not secure the private key properly, the resolution professional or liquidator may face difficulties in accessing these assets.
There is also the challenge of ensuring the transferability of digital assets. For example, certain cryptocurrencies or tokens may be subject to restrictions or may not be easily convertible into cash.
In cases where the digital assets of an insolvent company are held in foreign jurisdictions, cross-border insolvency issues may arise. Under the IBC, India follows certain principles outlined in the UNCITRAL Model Law on Cross-Border Insolvency, and the treatment of digital assets will need to comply with the laws of the jurisdictions in which the assets are located.
For example, if a company holds cryptocurrency on an exchange in another country, the RP or liquidator will need to navigate the foreign jurisdiction’s rules regarding the transfer or sale of digital assets.
In cases where the company’s creditors are interested in recovering their dues in the form of digital assets (e.g., cryptocurrencies), the Committee of Creditors (CoC) may discuss how these assets can be utilized in a resolution plan.
Creditors may also play a role in determining the sale or conversion of digital assets, especially if these assets are an important part of the company’s financial recovery.
Imagine a tech company undergoing CIRP that holds a significant amount of cryptocurrency as part of its assets. The company’s resolution professional (RP) would:
In the event of liquidation, the liquidator will attempt to sell the digital assets in the market or convert them into liquid funds for distribution to creditors.
The treatment of digital assets under the IBC is still evolving. While the IBC does not have specific provisions for cryptocurrencies or blockchain-based assets, they are generally considered property and are subject to the same processes as traditional assets during CIRP or liquidation. However, there are challenges related to their valuation, transferability, and the securing of private keys. As digital assets become more integrated into the financial system, it is likely that further regulations and clarifications will emerge, providing more certainty in the treatment of such assets during insolvency proceedings.
Answer By Law4u Team
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