Indian Insolvency Laws Lack Clear Rules for Crypto Investors After Exchange Failure

Crypto investors could face uncertainty over recovering their holdings if an exchange fails, as India’s current insolvency laws lack clear rules on protecting customer assets, according to a research paper published by the Insolvency and Bankruptcy Board of India (IBBI) . The paper flags gaps in deciding who owns the crypto held by an exchange and whether it should be returned to customers or used to repay the exchange’s debts. It proposes explicitly recognising virtual digital assets as property under the insolvency and bankruptcy code (IBC) . It also calls for rules to keep customer holdings separate from an exchange’s own assets, determine the value of crypto during insolvency and deal with cases involving exchanges operating across countries. The concern is that customers could face a prolonged legal battle to recover their holdings if an exchange collapses, particularly when ownership records are unclear or customer assets are mixed with company funds. The paper examines the WazirX controversy and legal developments around the treatment of crypto assets to make the case for clearer rules. The paper does not propose giving crypto customers preferential status as financial creditors, as was done for homebuyers under the IBC. Instead, its recommendations focus on establishing customers’ ownership of their holdings and protecting those assets from being treated as the exchange’s own property. Srinivasa Rao, senior partner (risk advisory) at Nangia Global, said retail investors could be left at the back of the queue when an exchange fails if their tokens are held in a pooled wallet alongside other assets. “The IBBI proposal to legally separate user holdings from company money gives investigators a clean trail to follow and ensures customer funds are returned, not locked in years of litigation,” he said. Soham Jethani, managing partner at SEPTTEN Advisors, said mandatory separation of customer assets was a familiar safeguard in regulated financial services and should apply to crypto exchanges as well. “Customer money should be held in designated client accounts, and customer crypto in wallets separate from the exchange’s own assets. The law should expressly preserve customer ownership and exclude those holdings from the exchange’s insolvency estate,” he said. Jethani pointed to Dubai’s Virtual Assets Regulatory Authority (VARA) framework, which provides for customer-asset safeguards alongside insurance protections. He said crypto-specific insolvency rules were necessary but could not replace regulation of exchanges from the outset. “Customers should not have to wait for an exchange to collapse before the law clarifies what protection they have,” he said, adding that the lack of a comprehensive regulatory framework had left basic customer safeguards unresolved. The paper also flags difficulties in valuing volatile crypto holdings and recovering assets across jurisdictions, as exchanges may have operations or legal entities in different countries. It recommends changes to address these issues.