Author Default(By Avnip Sharma, Bharati Vidhyapeeth, Pune, 5th year, B.B.A. LL.B. and Nisha Pasari, Banasthali Vidyapith, Jaipur, 4th year, B.B.A. LL.B.)
1. Introduction
The Year 2008 did went hand in hand with catastrophe in the economic history of the world. [1] After the credit defaults and the pre-packed subprime loan in the United States of America led to a Global clang of the stock market, market-watchdogs witnessed an unobtrusive $800 Billion financial structure trapped into the narrow void of technology and finance. This financial meltdown of the economy gave birth to cryptocurrencies (“Crypto”) and Bitcoin (“BTC”), the world’s first decentralized digital currency.
As per a Finder research [2], Asian countries like India, UK, and Vietnam adoption rate are growing comparatively high with the rest of the countries & also in term of usage. It has been witnessed that the usage and adoption rate in India has risen tremendously ever since the Supreme Court of India held vide RBI circular dated April 4, 2018[3], ‘barring banks and financial institutions under the RBI ambit from providing any services to any individual or legal entity dealing in cryptocurrency as invalid’. [4]
However in March 2020, Supreme Court in Internet and Mobile Association of India (IMAI) vs. Reserve Bank of India [5], held that Reserve Bank’s prohibition vide notification RBI/2017-18/154 on allowance for Crypto withdrawals as unconstitutional. As on and after Supreme Court’s detailed analysis neither the SC nor RBI was able to bifurcate or reach a consensus as to in which category of financial instrument the Crypto shall be placed [6]. Under the Indian Law, the term ‘Currency’ has been demarcated under Section 2 (h) of FEMA, i.e. all currency notes, postal notes, postal orders, money orders, cheque, drafts, travelers cheque, letters of credit, bills of exchange and promissory notes, credit cards or such other similar instruments, as may be notified by the Reserve Bank [7], vis-à-vis Section 28A of the RBI Act, 1934. Whereas, Cryptocurrencies or Virtual currencies does not fall under the ambit of the above mentioned definition neither RBI has notified it as currency till date.
In addition to the above mentioned advancements, the Ministry of Corporate Affairs amended Schedule III of the Corporations Act of 2013, requiring companies to report their crypto-assets and cryptocurrency transactions in their balance sheets. These moves have given a big boost to India’s cryptocurrency ecosystem, indicating that the government’s stance on cryptocurrency is changing. This is expected to give bitcoin transactions and assets in India even more impetus.
2. Cryptocurrency under the Indian Law
At present, there is anonymity associated with the use of cryptocurrencies in India, as such, there are no regulations governing cryptocurrencies in India. In March, 2020, the Reserve Bank of India’s (RBI) circular to ban banks from supporting crypto transactions, was quashed by the Supreme Court in the landmark case of Internet and Mobile Association of India vs. Reserve Bank of India.
In the present case the Supreme Court has made a comprehensive scrutiny of cryptocurrencies, still neither Reserve Bank of India (RBI) nor the Supreme Court was able to figure out on which group of financial instrument cryptocurrencies to be placed. If we look into the definition of ‘currency’, as defined under Section 2(h) of the Foreign Exchange Management Act, 1999 with respect to Section 28 of the Reserve Bank of India Act, 1934, we would find that cryptocurrency do not fall under the ambit of the term currency. Furthermore, if cryptocurrency is well-thought-out to be a form of currency then it will be non-taxable under the Income Tax Act of 1961 because as per the definition of ‘income’ under Section 2(24) of the Income Tax Act, 1961[8] eliminates the term currency from the domain of the word income.
However, In January 2021, the Government of India has shed some light over the existing situation vide notification [9] and stated that the transfer of cryptocurrency would be taxable under the Income Tax Act, 1961 “The gains resulting from the transfer of cryptocurrencies / assets are subject to tax under a head of income, depending upon the nature of holding of the same” This notification by the government clarifies the position of Crypto as not to be classified as an currency but to be treated as category of goods in Indian Law perspective. It is also evident to note that, The Indian government is considering imposing an 18 percent GST on overseas crypto exchanges that conduct business with Indian individuals, and cryptocurrency would be recognized as a good for this objective. Furthermore, if we look into the Section 2(h) of the Securities Contract Act, 1956 and the Forward Contract Regulation Act, 1952 does not have any discussion of cryptocurrency.
Moreover, if we look into the analysis of the Supreme Court in the Internet and Mobile Association of India vs. Reserve Bank of India case it has discussed the treatment of bitcoin, ethereum, i.e. different forms of cryptocurrencies, in different jurisdictions of the globe, to be specific UK and USA. In the present case, the Supreme Court has opined that In US, few cryptocurrencies that have the features of initial coin offers (ICOs), for example $ NEO, $EOS are considered as securities. Whereas, BTC and other tradable assets like Ethereum (ETH) are considered as commodities.
From the above discussion, the authors come to a conclusion that cryptocurrency would fall under the term ‘goods’ as mentioned under Section 2(7) of The Sales Goods Act, 1930 [10] because it says that the term goods includes all kinds of movable property like stock, shares, and even commodities.
3. Interplay of Insolvency Laws with Cryptocurrencies
3.1 Insolvency Proceedings
The Insolvency and Bankruptcy Code, 2016 (‘IBC’) exists to tenacity of issues pertaining to default in the repayment in a specific time-bound process. In an insolvency prosecution, the parties are ordinarily a creditor, debt—a claim or a liability, and corporate debtor. When a debtor defaults, the creditor takes custody of the debtor’s property with the assistance of the adjudicating authority and the authorized insolvency professional. They restructured it after that to fix the payment default. A detailed look has been taken at the definitions of each of these terms to see if a cryptocurrency asset has any chance of being included in this transaction.
Any individual to whom a debt is owed is a creditor, according to Section 3(10) of the IBC. [11] This debt could be pecuniary or operational. Operational debt is defined as commodities and services under section 5(21) of the IBC. [12]
Example, a person lends a corporate debtor 10 BTC. Because BTC is an operational obligation (it falls under the broad category of “goods”), the corporate debtor will be held accountable in the event of non – payment.
As per 3(27) of IBC, assets includes cash, commodities, land or actionable claims situated in or out of the India. As a result, once a default has been proved, the adjudicating body has the ability to impose restructuring. While doing so, an insolvency professional can collect information on the debtor’s “assets” and seize command of them, whether they are tangible or intangible assets, under section 18(f). As a result, regardless of how cryptocurrencies are classified, they remain an asset that is subject to the IBC’s restructuring procedure.
3.2 Token Holders Right
Whether a token holder have a right to claim the tokens back from an exchange that is currently going in insolvency processes, this particular question came into the picture when Mt. Gox, the largest cryptocurrency exchange went bankrupt. The exchange went into bankruptcy owing to hackers misappropriation of 7, 77,800 BTC from MT. Gox in 2014. Mt. Gox’s reorganization began in Japan as a standard insolvency petition. However, it swiftly became a civil rehabilitation case when the appointed trustee, who was akin to an insolvency resolution expert under sections 267 and 268 of the IBC, sold large sums of BTC, causing a bear market. Despite the fact that Japanese proceedings require the “trustee” to sell company assets, the court allowed a civil rehabilitation suit in 2017 after considering the merits of the petitioners’ request, allowing the trustee to distribute tranches of BTC to creditors in proprietary form instead of fiat.
In the case of Mc Vicker vs. Gigawatt Inc [13], The US Court witnessed an issue, where they have to decide pertaining to the rights of Gigawatt token holder under the US Bankruptcy Code. In the process of the final decision court noted that:
“A WTT Token is an Ethereum token that represents the right to use Giga Watt processing center’s capacity, rent-free for 50 years, to accommodate 1 Watt of mining equipment power consumption, as per the White Paper.”
The court observed as follows, that these are the characteristics of a utility token, and owing to this stance a token holder can’t be said or considered as a member to the company and any equity invested appears to be services offered by the utility token.
4. Problems faced by Insolvency Resolution Professionals:
As previously stated, due to the fledgling nature of cryptocurrencies, there is now a regulatory and identification gap. When dealing with a cryptocurrency-based restructuring, this is certain to cause a slew of complications for an insolvency professional.
4.1 Ascertaining the crypto assets of debtors:
The first challenge an Insolvency resolution professional will face is determining the existence of the asset. One such difficulty would be determining whether or not the debtor has any bitcoin assets. Companies are now obligated to disclose their cryptocurrency assets as a result of recent government modifications to Schedule III of the Companies Act, 2013, making it easier for insolvency specialists to determine the assets’ existence and whereabouts.
Since bitcoin is typically maintained in a private cryptocurrency wallet and accessed only by a private key, an insolvency professional would also require the debtor’s full cooperation in order to seize control of his cryptocurrency assets while executing a restructuring procedure. Furthermore, if a debtor’s cryptocurrency assets are stored in a custodial cryptocurrency wallet rather than a private cryptocurrency wallet, the insolvency professional may have difficulty distinguishing the debtor’s cryptocurrency assets from the cryptocurrency assets of the custodial cryptocurrency wallet provider’s other clients.
4.2 Liquidation of crypto assets:
Another challenge that an insolvency professional would face comprises liquidation of these assets due to the volatile nature of cryptocurrencies. If an insolvency professional liquidates a big number of bitcoin assets in one go or over a short period of time, the price of the underlying cryptocurrency may be affected. In 2018, one such occurrence occurred when the trustee changed a significant portion of cryptocurrency assets into cash for distribution to creditors, causing the price of the affected currency to plummet. The creditors slammed the trustee’s decision, claiming it went against the trustee’s duties to maximize the value of the assets on behalf of the creditors.
4.3 Updating token held by debtor to newer version
Besides, another huge obstacle that both the creditor and the Insolvency Resolution Professional would similarly confront is observing an answer when the token held by the debt holder has been upgraded to a newer version. For instance, assuming a problem is found in the block chain, or in case any crypto has been purloined, then the older version will become outdated and the community will fork the chain into the updated version. [14] In 2016, ETH was parted into Ethereum and Ethereum Classic when a defect in the DAO project was found. [15]
4.4 Tokens or exchanges when listed outside the nation border
Lastly, the most troublesome issue an Insolvency Resolution Professional would face would be the point at which the tokens or trades are listed outside the country border. Cryptocurrencies are planned to be borderless answers for making transactions. [16] Benefits of such currencies are utilized by individuals around the globe. [17] It is very evident from this fact that whenever any issue occurs, there will be shareholders from about 15 or more different jurisdictions. However segment 18(f) (i) permits an Insolvency Resolution Professional to yield responsibility of resources outside the national boundaries, the reasonable items related with it will be troublesome when the Insolvency Resolution Professional of one locale needs to come into a concurrence with that of one more in a profoundly disarranged space of contention of laws. [18] Additionally, to recuperate resources, collaboration of various non-gatherings, for example, token suppliers and banks will be required.
5. Conclusion:
Cryptocurrency is an embryonic technology which is definitely going to strengthen its roots worldwide in the near future. The anonymity regarding the regulations of digital currency in India will undoubtedly pose several challenges for an Insolvency Resolution Professional while dealing with insolvency proceedings which comprises crypto assets. It would be helpful if the government comes up with proper explanations with respect to the interplay between the current provisions of insolvency and crypto assets. With each passing day the cases involving digital currency are increasing in number. Therefore, proper regulation of cryptocurrency in India is the need of the hour.
References:
[1] Charles Collyns, The Crisis through the Lens of History, Int’l Monetary Fund, (December 2008), https://www.imf.org/external/pubs/ft/fandd/2008/12/collyns.htm
[2] Cryptocurrency adoption rate: Finder Crypto Report, https://dvh1deh6tagwk.cloudfront.net/finder-us/wp-uploads/sites/5/2021/06/Crypto_Adoption_final-compressed-1.pdf
[3] RBI/2017-18/154, DBR.No.BP.BC.104 /08.13.102/2017-18, Prohibition on dealing in Virtual Currencies (VCs), https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11243&Mode=0
[4] Ibid [5] Writ Petition (Civil) No.528 of 2018 [6] Writ Petition (Civil) No.528 of 2018, Para: 28-29 & 43 [7] The Foreign Exchange Management Act, 1999, Act No. 42 of 1999[8] Income Tax Act, 1961, https://www.incometaxindia.gov.in/_layouts/15/dit/Pages/viewer.aspx?grp=Act&cname=CMSID&cval=102120000000076764&searchFilter=[{%22CrawledPropertyKey%22:1,%22Value%22:%22Act%22,%22SearchOperand%22:2},{%22CrawledPropertyKey%22:0,%22Value%22:%22Income-tax%20Act,%201961%22,%22SearchOperand%22:2},{%22CrawledPropertyKey%22:29,%22Value%22:%222021%22,%22SearchOperand%22:2}]&k=&IsDlg=0
[9] Government of India, Ministry of Finance, Cryptocurrency Bill, https://www.medianama.com/wp-content/uploads/2021/03/AU31051.pdf
[10] “Goods” means every kind of moveable property other than actionable claims and money; and includes stock and shares, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale. [11] The Insolvency and Bankruptcy Code, 2016, Act No. 31 of 2016 [12] Ibid [13] Consolidated Class Action Complaint – 1 (No. 2:18-CV-00103-Smj)[14]Saul Bowden, What is a Cryptocurrency Fork? https://commodity.com/cryptocurrency/what-are-forks/
[15] Laura M., Ethereum vs. Ethereum Classic, https://www.bitdegree.org/crypto/tutorials/ethereum-vs-ethereum-classic.
[16] Simon Maynard & Elizabeth Chan, Decrypting Cryptocurrencies: Why Borderless Currencies May Benefit from Borderless Dispute Resolution, http://arbitrationblog.kluwerarbitration.com/2017/11/02/decrypting-cryptocurrencies-borderless-currencies-may-benefit-borderless-dispute-resolution/?print=print
[17] Carley Brennan, How Cryptocurrencies Help People Move Money around the World, https://corpblog.viasat.com/how-cryptocurrencies-help-people-move-money-around-the-world/
[18] Aryaja B. Majumdar, Risks of Cross Border Insolvency, 2 India L.J. (2020), https://www.indialawjournal.org/archives/volume2/issue_1/article_by_Aryja.html.
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