A Critical Study of the Treatment of Cryptocurrencies and Virtual Digital Assets under India

Abstract

The rapid proliferation of cryptocurrencies and Virtual Digital Assets (VDAs) in India has created significant regulatory lacunae, particularly within the country's insolvency framework. As digital assets increasingly constitute a substantial portion of corporate and individual financial portfolios, the absence of explicit statutory recognition and procedural clarity under the Insolvency and Bankruptcy Code, 2016 (IBC) poses acute challenges for insolvency practitioners, creditors, and adjudicating authorities. This paper critically examines the treatment of cryptocurrencies and VDAs within India's insolvency framework against the backdrop of the evolving digital economy. The study interrogates the foundational question of whether VDAs qualify as 'property' or 'assets' for the purposes of insolvency proceedings under the IBC and allied legislation, and evaluates the adequacy of the existing legal architecture in addressing the distinctive challenges posed by decentralised, borderless, and pseudonymous digital assets.
The methodology adopted is doctrinal and comparative: the paper analyses the IBC, the Finance Act 2022 (which first defined VDAs under Indian tax law), SEBI regulatory consultations, and RBI advisories, while drawing upon comparative frameworks from the United Kingdom (Insolvency Act 1986 as interpreted through the UK Jurisdiction Taskforce's Legal Statement on Cryptoassets), the European Union (MiCA Regulation 2023), and the United States (Bankruptcy Code treatment of digital assets in cases such as Celsius Network and FTX). The paper argues that the current Indian insolvency framework is structurally unprepared to handle VDA-related insolvencies, evidenced by challenges in asset identification, valuation volatility, jurisdictional reach, and the risk of fraudulent dissipation. It further contends that targeted legislative intervention either through amendment of the IBC or supplementary regulations is imperative to establish a coherent and enforceable regime for VDA treatment in insolvency proceedings.

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