CRYPTO-ASSETS AND THE PROTECTIVE REGIME ASSOCIATED WITH IT IN INSOLVENCY.

ABSTRACT

The article discusses the analysis of rights attached to cryptocurrencies and their classification as movable
property. It highlights that crypto assets are governed by computer-based codes and languages, making them akin
to movable property. The Sales of Goods Act in the Indian context defines movable property as goods other than
actionable claims, which can be applied to crypto assets in insolvency proceedings. The transfer of ownership and
compliance with the act are discussed, emphasizing the importance of written contracts in blockchain transfers.
Complications in applying the Sales of Goods Act in insolvency proceedings are identified, particularly when
possession rests with the debtor. Retention clauses in contracts are suggested as a solution. The abstract also
presents a case involving crypto assets where the Sales of Goods Act can be applied. Additional safeguards
provided by sections 55 and 56 of the act are outlined, offering remedies in case of non-payment. The application
of the Indian Insolvency and Bankruptcy Code (IBC) to cryptocurrency is explored, highlighting the classification
of cryptocurrency-related debts as operational debts. The authority of the Insolvency Professional to assume
control over cryptocurrency assets during the restructuring process is discussed, including the potential re-keying
of private cryptocurrency wallets. Challenges such as valuation difficulties, cross-border complexities, and the
volatility of cryptocurrencies are addressed. The abstract concludes that while the IBC can be applicable to
cryptocurrency, various challenges need to be addressed by Insolvency Professionals in handling insolvency
proceedings involving cryptocurrency effectively.

INTRODUCTION

By the start of the year 2022, India had witnessed a significant surge in investments in cryptocurrencies, with
nearly 638 million USD allocated to this new form of digital assets. However, the absence of concrete legislation
specifically designed to regulate and govern crypto-assets in the country has created a complex and uncertain legal
landscape. This lack of regulatory clarity has given rise to numerous questions regarding the nature of
cryptocurrencies and their applicability in insolvency proceedings. In light of these circumstances, this article
aims to delve into the intricate nature of cryptocurrencies and explore the relevant provisions and legislations that
can be applied in insolvency proceedings, particularly within the framework of the Indian Insolvency and
Bankruptcy Code (IBC). The objective is to provide insights and guidance for stakeholders involved in handling
the challenges posed by the inclusion of cryptocurrencies in the insolvency framework.

One of the key areas of focus in this article is the role of the Insolvency Professional (IP) in managing crypto-
assets during the restructuring process. The article will shed light on the complications that an IP might encounter
when dealing with these unique digital assets. It will delve into the technical complexities associated with
cryptocurrencies and address potential challenges faced by IPs, such as accessing and securing private
cryptocurrency wallets, valuing crypto-assets, and complying with cross-border regulations. Furthermore, the
article will explore the rights that can be availed by corporate creditors in the restructuring of crypto-assets. It will
examine how the provisions and remedies under the Sales of Goods Act can be applied to protect the interests of
creditors, particularly in cases where possession of the assets lies with the corporate debtor. The article will also
discuss the significance of retention clauses in contracts as a means to safeguard creditor interests and ensure the
enforceability of rights under the Sales of Goods Act.

Through a comprehensive analysis of the existing legal framework, relevant provisions, and practical
considerations, this article aims to offer insights and recommendations to navigate the complex terrain of
insolvency proceedings involving cryptocurrencies. By addressing the legal uncertainties and challenges
surrounding the treatment of crypto-assets within the IBC, this article seeks to provide a foundation for
establishing effective and transparent procedures for dealing with these digital assets in insolvency cases.

THE INTERPLAY BETWEEN SOGA AND IBC

To trace the rights attached to the crypto-currencies, one has to analyse the nature and features of these assets.
These crypto assets at the fundamental level are governed through computer-based codes and languages. As
bitcoin can be delivered by sending bitcoins from wallet to wallet through a private key, 1 it can appropriately be
regarded as Movable property. The same has been held by the courts of Amsterdam and the UK. 2 The apt definition
of Movable property in the Indian context has been defined under section 2(7) of the Sales of Goods act which
stipulates that Movable property are goods other than actionable claims.3 To this end, it can be stated that the
rights and liabilities illustrated under the sales of Goods (herein will be referred as SOGA) act shall be applied to
the crypto assets in Insolvency proceedings. Similarly, if the ownership of these assets has to be passed from the
corporate debtor to the creditor, then the Insolvency professional (Herein will be referred as IP) shall ensure
compliance with the act. As per section 5(2) of SOGA, the contract can partly be made in written or in ora l.4
Though, in the case of blockchain transfer, the legal certainty shall be achieved through the written contract. To
ensure the synchronization between the ownership and blockchain, the contract shall impose a condition which
necessitates the transfer of title of crypto precedent to any other condition. The transfer can be carried out by the
transfer of a private key or by any other symbolic transaction. This sign or symbolic transaction could also include
a password or certain encryption of a private key that would be necessary to acquire the possession of these digital
assets. Even in a case, the Dutch Banking Association once argued that access to private keys shall amount to the
possession of these digital goods. 5

However, certain complications are associated with the application of SOGA in insolvency proceedings. The
foremost constraint is that most of the rights illustrated under SOGA are applicable when the possession is with
the Corporate creditor itself. But in most insolvency proceedings, the possession of goods mainly rests with the
debtor itself. To solve this constraint, one could rely upon the retention of clauses in the contract. These clauses
are generally part of the commercial contract that could be used to guard the creditor’s interest by mandating the
title with the creditor until the occurrence of a future event which has been recognised under section 19 of SOGA.
Even there are certain cases involving crypto assets where SOGA can be applied. For Instance, in the case of

1
Chason, Eric D. "How Bitcoin Functions As Property Law." Faculty Publications, 2019, 1896.
2
Koinz Trading BV. 20 March 2018. Case ECLI:NL:RBAMS:2018:869, R v Teresko (Sergejs) – unreported. 11 October 2017.
3
Sales of Goods Act, 1949, $ 2(7), No.3 Acts of Parliament, 1949.
4
Id. $ 5(2).
5
Dutch Banking Association. (2020). Crypto-assets in Dutch perspective: Opportunities for a Dutch crypto-asset ecosystem (pp. 8-9).
Available at: https://www.nvb.nl/media/3560/nvb-crypo-assets_eng.pdf (accessed 9 November 2020).
HashFast Technologies LLP, the company seeks the help of Dr Marc Lowe to assist the company in mining
bitcoins. In exchange, the hashfast had to pay him the 10% of the profits. As per the deal, they paid him the amount
through 3000 Bitcoins.6 However, when the company goes bankrupt, they sought to declare the transfer as
fraudulent as the value of those bitcoins tripled to more than 1 Million USD. 7 The case was later settled by the
parties outside the court. These categories of cases where the possession rests with the corporate creditors are best
suited to solve through the application of SOGA. The prime reason rests with sections 47, 50 and 54 which deal
with the right to lien, right to stoppage in transit and right to re-sale respectively. 8 The following rights illustrate
the right of the unpaid seller to retain the possession of goods until the payment shall be made by the buyer.9
Though, the right can only be exercised till the seller/creditor has possession and ownership of goods. Similarly,
the right to stoppage in transit refers to the right of the seller to stop the transportation of goods even if the goods
maybe with a carrier before they could reach the buyer or his/her agents. These rights will cease to exist once the
ownership or the possession will be transferred to the buyer/ corporate debtor.10 Hence, the best alternative to
ensure the applicability of SOGA in the insolvency of crypto-assets is to count on the retention of clauses in future
contracts. However, there is no need for additional safeguards in cases where the possession rests with the
seller/creditor as was the case in Hashfast.

In accumulation to these aforementioned provisions, certain additional safeguards can be found in sections 55 and
56 of SOGA. It stipulates the remedies in two conditions. The first situation arises when the good has already
been delivered under the possession of the buyer and he/she refused to pay whereas the second arises when the
payment has been agreed on a certain date and the buyer refused to pay. In both circumstances, the seller can sue
the buyer for the price of the goods.11 This section if applied in the insolvency proceedings concerning crypto-
assets, can work as an additional remedy for the operational or financial creditor. Furthermore, section 56 asserts
that the seller can sue the buyer for non-payment wherein the damages have to be determined by sections 73 and
74 of the Indian Contract Act.12 Therefore, it can be concluded that the liquidation of assets by IP shall be
confirmed to the principle for assessment of damages under the aforesaid sections of Indian contract act.

When it comes to the applicability of the Indian Insolvency and Bankruptcy Code (IBC) to cryptocurrency, there
are several aspects that deserve further elaboration. Cryptocurrency, being a relatively new form of digital asset,
presents unique challenges within the existing legal framework. The IBC, enacted in 2016, was primarily designed
to address insolvency and bankruptcy matters in traditional financial systems. However, it is still applicable to
cryptocurrency under certain circumstances. In the context of the IBC, debts are classified as financial or
operational. Section 5(21) of the IBC categorizes cryptocurrency-related debts as operational debts because
cryptocurrency can be considered a form of "goods." This classification implies that if there is a default on an
operational debt involving cryptocurrency, the corporate debtor becomes liable for payment. Once a default is

6
Declaration of Defendant in Opposition to Partial Summary Judgment, ¶¶ 5–12, Kasolas v. Lowe (In re HashFast Techs. LLC), Ch. 11 Case
No. 14-30725, Adv. No. 15-03011 (Bankr. N.D. Cal. Feb. 5, 2016).
7
Id.
8
SOGA, Supra note 3 ¶¶ Sec. 47.50 and 54.
9
Id. ¶¶ Sec 49.
10
Id. ¶¶ Sec 52.
11
Sales of Goods act, 1949, $ 55, No.3 Acts of Parliament,1949.
12
Id. ¶¶ Sec 56.
established, the Adjudicating Authority can pass a restructuring order. In such cases, the creditor, with the
assistance of an appointed Insolvency Professional, gains the authority to take control of the debtor's property to
address the default. Section 3(27) of the IBC defines property to include money, goods, land, or actionable claims.
As cryptocurrency falls within the category of goods, an Insolvency Professional can exercise control over
cryptocurrency assets during the restructuring process. Even if the cryptocurrency is stored in a private
cryptocurrency wallet, the Insolvency Professional still possesses the authority to assume control over it. This
provision is significant because private cryptocurrency wallets are typically owned and controlled by individuals,
and access to them is limited to the private key holder. However, the IBC grants the Insolvency Professional the
power to secure and potentially re-key the cryptocurrency assets in order to gain control over them.

It is important to note that the valuation of cryptocurrency assets presents a major challenge within the insolvency
proceedings. Due to the absence of specific provisions for cryptocurrency valuation, Insolvency Professionals
must rely on experts in the field who can provide accurate and reliable valuation methodologies. Additionally,
cross-border issues further complicate insolvency proceedings involving cryptocurrency. Cryptocurrencies
operate on distributed ledger technology, and their transactions are not tied to any specific jurisdiction. This lack
of geographical boundaries can lead to difficulties in enforcing orders and recovering assets in multiple
jurisdictions, especially in the absence of consistent cross-border regulations. Moreover, the volatile nature of
cryptocurrencies poses another significant challenge. Liquidating a large amount of cryptocurrency assets at once
or within a short timeframe can potentially impact the price of the specific cryptocurrency involved. This volatility
was demonstrated in the case of the Gox trustee in 2018, where the rapid conversion of cryptocurrency assets into
cash for distribution to creditors led to a sharp decline in the cryptocurrency's price. Insolvency Professionals must
carefully manage the liquidation process to minimize adverse effects on the value of the cryptocurrency assets.

In summary, while the Indian Insolvency and Bankruptcy Code can be applicable to cryptocurrency under certain
circumstances, there are various challenges that Insolvency Professionals face in handling insolvency proceedings
involving cryptocurrency. These challenges include valuation difficulties, cooperation from custodial wallet
providers, cross-border complexities, and the inherent volatility of cryptocurrencies. By working with experts and
carefully navigating these challenges, Insolvency Professionals can effectively manage restructuring processes
involving cryptocurrency within the framework of the IBC.

CHALLENGES FACED IN INSOLVENCY OF CRYPTOCURRENCIES

One of the key problems and challenges faced by Insolvency Professionals in handling restructuring processes
involving cryptocurrency is the lack of regulation and identification of these assets. The absence of clear
regulatory frameworks for cryptocurrencies creates difficulties in determining the existence and location of
cryptocurrency assets owned by the debtor. However, recent amendments to Schedule III of the Companies Act,
2013, now require companies to disclose their cryptocurrency holdings, which helps Insolvency Professionals
establish the presence and whereabouts of such assets. Valuing crypto assets poses another significant challenge.
Unlike traditional assets that have established valuation methodologies, determining the value of cryptocurrencies
can lead to legal disputes and the need for expert witnesses, evidence, and comparisons to similar assets. Given
the volatility and lack of external fixed pricing for digital assets, accurately valuing them becomes even more
challenging. Unfortunately, the bankruptcy proceedings under the IBC currently lack specific provisions for
conducting valuations of crypto assets.
Another issue arises from the storage of crypto assets in hot and cold wallets. Cold wallets, which are offline
storage devices, offer higher security but pose challenges when it comes to transferring or freezing assets, as there
is no central authority or bank involved. On the other hand, hot wallets, typically held with exchanges, allow
administrators, liquidators, or trustees to communicate with the exchange. However, if the individual holding the
wallet forgets the key, accessing the decentralized wallet becomes impossible without a way to reset the key.
Engaging experts who can provide assistance in securing and potentially re-keying crypto assets becomes crucial
for Insolvency Professionals in such cases.13 Cooperation from custodial cryptocurrency wallet providers also
presents a challenge. When cryptocurrency assets are stored in custodial wallets, segregating the debtor's assets
from those of other customers of the same wallet provider can be inconvenient for the Insolvency Professional.
The full cooperation of the debtor is essential in gaining control over their cryptocurrency assets, as these assets
are typically accessible only through a private key associated with the private cryptocurrency wallet.

Furthermore, cross-border issues add complexity to insolvency proceedings involving cryptocurrencies.

Distributed ledger technology allows cryptocurrencies to operate across multiple jurisdictions, and this lack of
geographical confinement can lead to challenges in enforcing orders and recovering assets in different countries.
Inconsistent cross-border regulations may result in contradictory judgments across jurisdictions, causing further
complications for office holders and trustees seeking recovery in various locations. The volatile nature of
cryptocurrencies also poses challenges. Liquidating a significant portion of cryptocurrency assets all at once or
within a short period can impact the price of the specific cryptocurrency involved. The case of the Gox trustee14
in 2018 serves as an example where converting a substantial amount of cryptocurrency assets into cash for
distribution to creditors led to a sharp decline in the currency's price, generating criticism from the creditors.
Insolvency Professionals must carefully manage the liquidation process to minimize adverse effects on the value
of the cryptocurrency assets.

CONCLUSION

The implication of crypto assets as property has attracted significant studies and claims internationally. However,
no adequate efforts have been made in India to illustrate the nature of crypto. This eventually left the corporate
creditors with minimal or no protection in future insolvency proceedings. Hence, the nature of these assets shall
be determined to confer an adequate protective regime for both parties. Moreover, the statutory remedies shall be
enhanced to an extent to make them more adaptive to the insolvency regime. Further, it is not new that the
legislations such as SEBI Act and SARFESI Act often came in conflict with IBC laws. Similarly, the statutes like
SOGA too contains provisions that demand harmony and conformity with IBC Code. The absence of certainty on
the nature of virtual currencies and the inharmonious construction of Indian legislations would certainly pose the
delinquency in future. Moreover, Insolvency Professionals face several challenges when dealing with
restructuring processes involving cryptocurrency. These include the lack of regulation and identification,
difficulties in valuing crypto assets, issues with hot and cold wallets, cooperation from custodial wallet providers,

13
Grant Thornton, "Challenges Posed by Crypto assets in Restructuring and Insolvency Appointments", Grant Thornton, available a t
https://www.grantthornton.co.uk/insights/challenges-posed-by-cryptoassets-in-restructuring-and-insolvency-appointments/, last visited on 5
March, 2023.
14
Joanne Molinaro, Susan Poll Klaessy, "Crypto As Commodity, And The Bankruptcy Implications", Law360 , available at
https://www.foley.com/en/insights/publications/2018/10/crypto-as-commodity-and-the-bankruptcy-implication, last visited on 5 March,
2023.
cross-border complexities, and the volatile nature of cryptocurrencies. By considering these challenges and
seeking expert guidance, Insolvency Professionals can navigate the complexities and effectively handle
cryptocurrency-related insolvency proceedings within the existing legal framework.