Insolvency and Digital Assets: Key Legal Challenges

Introduction

With the advent of technological revolution, the financial sector around the world has witnessed a stirring increase in digital assets. These assets ranged from bitcoins to non-fungible tokens (NFT) stablecoins, Central Bank digital currencies (CBDCs), and even tokenised forms of traditional securities.¹ The concept which was introduced as an experiment on the periphery of technology has taken over mainstream finance. The growth has gone to the extent that nowadays companies, startups and global corporations are holding these assets on their balance sheet, either as investments, as part of their business model, or as tools for raising capital.

This change introduced a new set of questions legal and regulatory luminaries, particularly in the domain of insolvency regime. As when the company owning digital assets enters into restructuring of goes into liquidation, various critical questions come into picture such as:

(a) Whether digital assets should be treated like any other property under the Insolvency and Bankruptcy Code, 2016 (IBC)²?

(b) What mechanism should be opted to value digital assets considering its fluctuating nature?

(c) How to determine the liability of safeguarding them, considering their access depends on private keys or custody arrangements?

(d) How should the distribution take place among creditors?

These questions hold pertinent significance in determining the future of cryptocurrency around the world.³ Though few countries have come up with guidelines and regulations to regulate digital assets not only in the financial world but also in the insolvency arena, concreteness is still missing. The aforesaid concerns became talk of the town when recently the Indian Government made cybersecurity audits mandatory for all kinds of crypto exchanges and custodians, citing their worry towards high profile hacks and fear of loss of investor deposits.⁴ This step by the Indian Government shows that finally the risks posed by digital assets are being recognised concerning its custodianship. Similar is the issue which is being confronted by resolution professionals while carrying out the IBC proceedings. But the pertinent question is “is this step enough”? In my opinion, of course not.

As we all know that Indian insolvency laws are governed by the IBC, which is considered as progressive legislation, but is falling short of provisions regulating digital assets. This loophole in legislation is creating hassle in governance of one whole significant sector leaving insolvency professionals, creditors and courts uncertain. Therefore, it becomes important to examine that how foreign jurisdictions are dealing with it and what approach India can opt suited to its circumstances.

The inch perfect concept of digital assets

The concept of digital assets in simple words is “assets in electronic form”. These assets do not derive their value from any physical format, rather it is determined through the rights conferred on the bearer of the same.⁵ The formation of these assets is primarily based on blockchain, and similar other technologies wherein they are recorded in secure tamper-resistant ledgers.

The category of digital assets is extremely broad. It includes:

(1) cryptocurrencies like bitcoin and ethereum, which can function as payment systems or investment assets;

(2) NFTs, which certify ownership of unique digital works;

(3) stable coins, pegged to traditional currencies or commodities to reduce volatility;

(4) CBDCs, which are State-issued digital versions of national currency; and

(5) tokenised securities, where shares, bonds, or other instruments are issued in digital form.

The aforesaid categorisation and its explanation manifests that what sets digital assets apart from general assets is that its intangible nature, fluctuating tendency, capability of cross-border transfer, often decentralised and encrypted through cryptographic keys. Though these features give innovative status to the digital assets in the market but also bring challenges to the legal system. The most prominent challenges being confronted throughout the jurisdictions in the world are classification of digital assets, as some countries classify them as property, some as securities or commodities and few view them in altogether different categories.

This gap in uniformity of classification directly affects how digital assets are treated when a company faces insolvency. As it remains uncertain whether they should be considered part of the debtor’s property, or they should fall within the insolvency estate, or to be managed and distributed by the resolution professional. Further the list of questions acts as stumbling block in proceeding with these assets. India’s IBC, though progressive in many respects, does not yet provide clarity on these questions.

From property to pixels: Rethinking insolvency under the IBC

The IBC defines “property” in very broad terms under Section 3(27) wherein it elucidated “property” as “money, goods, actionable claims, land and every description of property, whether movable or immovable, tangible or intangible”.⁶ On paper, this wide definition seems capable of including digital assets. Yet, the absence of any express mention of cryptocurrencies, NFTs, or similar assets creates uncertainty about how they should be treated in practice.

The judicial position in India is equally unsettled but stands tested. In Internet & Mobile Assn. of India v. RBI⁷, the Supreme Court struck down the RBI’s Circular of “ring fencing” virtual transactions, holding them disproportionate. But the Court stopped short of defining the legal character of such assets — whether they amount to money, commodities, securities, or some other category of property. Crucially, there is no decision directly interpreting the IBC in the context of digital assets.⁸

For resolution professionals, this lack of clarity poses immediate and practical problems. How can they gain control over the debtor’s digital wallets and private keys, without which assets cannot be accessed? How should they value cryptocurrencies, given their volatile nature and the possibility of sharp price swings within days or even hours? And, in cases involving international creditors, how should they address cross-border transfers of assets that can move instantly across jurisdictions?

Another challenge is regulatory overlapping. While the Reserve Bank of India (RBI) has sought to regulate payment aspects and the Securities and Exchange Board of India (SEBI) oversees securities, no single law comprehensively governs digital assets in India. The much discussed and Regulation of Official Digital Currency Bill remains pending.⁹ As a result, the IBC stands alone, without supporting legislation to guide insolvency professionals on handling these new forms of property.

Jurisdictional responses to the insolvency of digital assets

The foreign jurisdiction in this concern has approached and resolved it to some extent. Therefore, it is important to examine how other jurisdictions are functioning to answer the question of volatility of cryptocurrencies.

(a) United States

American bankruptcy courts have consistently treated cryptocurrencies as property that forms part of the debtor’s estate. In Hashfast Technologies LLC, In re¹⁰, bitcoin was subject to avoidance powers, much like any other asset. In practice, large corporate collapses such as Celsius and FTX have shown how this works on the ground: trustees engaged blockchain forensic specialists to trace funds across wallets and sought court approval for structured sales of tokens. Creditor Committees were created to oversee these processes, showing that while valuation swings and fraudulent transfers remain obstacles, courts have begun to build a workable playbook for handling crypto insolvency.

(b) United Kingdom

English courts have gone further in clarifying the status of digital assets. In AA v. Persons Unknown¹¹, crypto was treated as property capable of being protected through injunctions. Insolvency practitioners have already relied on this approach to freeze wallets and realise tokens for distribution.¹² The insolvency service has authorised liquidators to sell crypto holdings through regulated exchanges, and the Law Commission has recommended creating an express statutory category for digital assets. These measures give insolvency professionals a clearer legal foundation and practical tools for asset recovery.

(c) Singapore

Singapore regulates digital assets under the Payment Services Act, 2019, which places exchanges and custodians under the supervision of the Monetary Authority of Singapore. A key practical benefit is the requirement for segregation of customer funds.¹³ When a licensed exchange faces insolvency, creditors can be assured that their assets are ring-fenced from the firm’s own liabilities. Insolvency administrators can therefore identify and return tokens with fewer disputes, and the system offers a model of how regulatory oversight directly strengthens creditor protection.

(d) European Union

The adoption of the Markets in Crypto-Assets Regulation (MiCA) in 2023¹⁴ gives the European Union (EU) a harmonised legal framework. For insolvency, MiCA’s insistence on custodial standards and asset segregation is particularly significant. Insolvency administrators across member States can now rely on consistent rules when dealing with crypto holdings, reducing uncertainty in cross-border proceedings. This makes the EU one of the first major regions to address insolvency risks not just through case law, but through comprehensive legislation.¹⁵

(e) Japan and Australia

Japan regulates cryptocurrencies under its Payment Services Act, 2009¹⁶, requiring exchanges to hold client funds separately in trust accounts. The Mt. Gox insolvency highlighted the dangers of weak safeguards, but subsequent reforms have tightened recovery mechanisms.¹⁷ Today, Japanese insolvency courts are better equipped to supervise the distribution of tokens.¹⁸

In Australia, courts have accepted cryptocurrencies as property. This has allowed liquidators to compel delivery of private keys and recover assets held in company wallets.¹⁹ In cases such as the collapse of Blockchain Global Limited, liquidators successfully traced and recovered tokens, showing that legal recognition backed by judicial enforcement can make digital asset recovery feasible in practice.

India’s next moves: Bringing digital assets into the insolvency fold

India’s insolvency regime cannot afford to remain silent on digital assets. As companies increasingly hold cryptocurrencies, tokens, and other blockchain-based instruments, the IBC must evolve to provide clarity. Some practical steps emerge from international practice and domestic needs:

(1) Statutory recognition

Section 3(27) of the IBC already adopts a broad definition of “property”, but ambiguity persists in the absence of explicit mention of digital assets.²⁰ A targeted amendment confirming that cryptocurrencies, NFTs, and other tokenised instruments fall within the insolvency estate would remove uncertainty and prevent debtors from exploiting interpretive gaps.

(2) Practical guidance for resolution professionals

Resolution professionals are not trained technologists, yet insolvency outcomes may depend on safeguarding private keys or arranging secure custody of tokens. The Insolvency and Bankruptcy Board of India (IBBI) should issue operational guidelines covering appointment of licensed custodians, valuation protocols tied to reference dates, and mechanisms for liquidation through regulated exchanges to ensure assets can be effectively realised for creditors.

(3) Regulatory coordination

The current regulatory landscape is fragmented the RBI has raised systemic risk concerns, SEBI has oversight of securities-like instruments, and the Finance Ministry has signalled taxation policy. Without harmonisation, conflicting interpretations are inevitable. A coordinated framework perhaps through a joint working group or cross-regulatory protocol would give professional resolutions to certainty and prevent disputes over jurisdiction.

(4) Borrowing international best practices

Other jurisdictions have already taken concrete steps. US bankruptcy courts treat crypto as property and have developed approaches to valuation and fraudulent transfers.²¹ English courts recognise crypto as personal property and allow insolvency administrators to recover it. The EU’s MiCA Regulation sets standards for exchanges and custodians.²² India can adapt these lessons — particularly custodial safeguards and segregation of client assets — rather than reinventing the wheel.

(5) Adapting cross-border rules

Digital assets are borderless, but insolvency law remains jurisdiction bound. India’s proposed adoption of the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvency²³ offers an opportunity: the implementing legislation should expressly cover digital assets, ensuring cooperation in tracing, freezing, and realising tokens held abroad.²⁴ Without this, cross-border recovery efforts will remain piecemeal and ineffective.²⁵

Conclusion

Digital assets are no longer speculative sidelines; they are becoming part of corporate treasuries, investment portfolios, and even payment systems. If the IBC remain silent, India risks leaving resolution professionals and creditors without the tools to deal with these assets effectively. A forward-looking framework — combining statutory recognition, operational guidance, regulatory coordination, and cross-border adaptability — will not only protect creditors but also align insolvency law with India’s broader ambitions of fostering a secure digital economy. Clear rules will enhance investor confidence, safeguard financial stability, and ensure that India’s insolvency regime remains relevant in an era where value is increasingly created and stored on the blockchain.