India’s cryptocurrency investors are facing renewed concerns over asset recovery after a new research paper highlighted gaps in the country’s insolvency framework. The recommendations focus on ownership rights, customer asset protection and clearer procedures when crypto exchanges fail.
Crypto Exchange Insolvency Raises Investor Protection Concerns
India’s cryptocurrency market is confronting an important legal question: what happens to customers’ digital assets when a crypto exchange becomes insolvent?
A research paper highlighted in an October 20, 2026, report by the Insolvency and Bankruptcy Board of India (IBBI) has drawn attention to gaps in the existing legal framework. The concerns centre on whether customers can establish ownership of cryptocurrency held by an exchange and how those holdings should be treated when the platform cannot meet its financial obligations.
Unlike conventional bank deposits, cryptocurrencies held through trading platforms do not automatically benefit from the same protection arrangements. The legal outcome can depend on the platform’s terms, how customer assets are held, the applicable laws and the circumstances surrounding its failure.
The issue has become increasingly relevant as exchanges provide services to customers across national borders. If a platform collapses, investors may face uncertainty over whether their cryptocurrency can be returned, whether they must submit claims as creditors and how long recovery proceedings could take.
IBBI Paper Calls for Clearer Crypto Asset Ownership Rules
One of the central issues identified in the research is the legal status of virtual digital assets during insolvency proceedings.
India recognises virtual digital assets for specific tax and anti-money laundering purposes. However, that recognition does not automatically settle every question about ownership, custody and recovery when a crypto exchange becomes insolvent.
The research recommends explicitly recognising virtual digital assets as property under the Insolvency and Bankruptcy Code, 2016. Clearer recognition could help insolvency professionals determine which assets belong to customers and which form part of the exchange’s own estate.
The paper also highlights the need for specific procedures covering the valuation of digital assets, the treatment of customer holdings and the recovery of assets held through entities operating in different jurisdictions.
These are recommendations for legal reform, not confirmation that a comprehensive crypto insolvency framework has already been implemented. Their practical impact will depend on whether the government and lawmakers adopt suitable changes.
Customer Asset Segregation Could Become a Key Reform
Another important recommendation is the separation of customer cryptocurrency from an exchange’s own assets.
When investors deposit cryptocurrency on a trading platform, the way those holdings are recorded and controlled can become critical if the business encounters financial distress. If customer assets are clearly identifiable and held separately, it may be easier to establish which holdings should be returned to their owners.
Without adequate segregation and records, disputes can arise over whether particular assets belong to customers, the exchange or other parties claiming repayment.
For example, imagine an investor holds Bitcoin through an exchange that subsequently enters insolvency proceedings. If the investor’s holdings are properly documented and separated from the company’s funds, establishing the claim may be more straightforward. If records are incomplete or the exchange has used customer assets for other purposes, recovery could become more complicated.
Segregation alone would not guarantee a full recovery. Missing assets, cybersecurity incidents, legal disputes and competing claims could still affect the outcome. However, clear custody rules could reduce uncertainty and make the insolvency process easier to administer.
WazirX Case Highlights Challenges in Crypto Recovery
The difficulties surrounding exchange insolvency are not merely theoretical. The WazirX cyberattack in July 2024 exposed the financial and legal complications that can arise when cryptocurrency held on a trading platform is lost.
The attack affected assets worth approximately $230 million to $235 million, according to widely reported estimates at the time. The incident led to extensive discussions about recovery, creditor claims and the responsibilities of cryptocurrency platforms.
The WazirX episode also demonstrated that a cyberattack and a conventional corporate insolvency are different problems, even though they can overlap. A security breach may cause assets to disappear, while insolvency proceedings determine how the remaining assets and liabilities should be handled.
The case raised questions about how customers should be treated when a platform cannot return their full holdings and how a recovery plan should account for losses across different users.
The latest discussion around insolvency reform reflects a broader need for legal clarity. Investors require more than assurances about platform security. They also need to understand their rights if security measures fail or a company becomes unable to meet its obligations.
Crypto Valuation and Cross-Border Recovery Pose Challenges
Cryptocurrency presents practical difficulties for insolvency professionals because its prices can change sharply within short periods.
If an exchange enters insolvency proceedings, administrators may need to establish the value of digital assets at a particular date. The choice of valuation date, pricing method and currency could influence the amount attributed to customer claims.
A framework that leaves these questions unresolved could lead to disputes between investors, creditors and the entity managing the insolvency.
Cross-border operations add another layer of complexity. An exchange may serve Indian customers through a corporate entity registered overseas, while its assets, service providers and related companies operate in several countries.
In such situations, determining the relevant jurisdiction, identifying the entity responsible for customer obligations and enforcing recovery claims can be difficult. Different countries may follow different insolvency procedures and approaches to digital asset ownership.
Clearer rules could help Indian investors understand where claims should be filed and how their rights may be enforced when a platform has international operations.
What the Proposed Reforms Could Mean for Investors
The recommendations could influence how cryptocurrency exchanges structure their custody arrangements, maintain customer records and prepare for financial distress.
For investors, the most important potential benefit would be greater clarity about ownership and recovery rights. Proper asset segregation, reliable records and consistent valuation rules could help reduce disputes when an exchange fails.
For crypto businesses, clearer insolvency requirements could introduce additional compliance responsibilities. Exchanges might need to strengthen internal accounting, document how customer holdings are managed and ensure that their arrangements meet applicable legal requirements.
However, stronger insolvency rules would not eliminate cryptocurrency investment risks. Market volatility, fraud, cyberattacks and operational failures would remain important concerns. Nor would legal reform necessarily guarantee that every investor receives all the assets they deposited.
The next step is to determine whether the recommendations lead to formal changes in the Insolvency and Bankruptcy Code or related regulations. Until a clear framework is established, investors should avoid assuming that cryptocurrency held on an exchange has the same legal protections as money deposited in a regulated bank account.
Key Takeaways
- An IBBI research paper has highlighted gaps in India’s legal framework for crypto exchange insolvency.
- Proposed reforms include clearer recognition of virtual digital assets as property and separation of customer holdings from exchange assets.
- The WazirX cyberattack demonstrated the challenges of recovering cryptocurrency following a major platform incident.
- Investors should understand custody arrangements and platform risks because insolvency reform does not guarantee complete recovery.
Frequently Asked Questions
1. What happens if a cryptocurrency exchange becomes insolvent in India?
Customers may need to establish their ownership or submit claims through the applicable legal process. Recovery depends on available assets, the exchange’s legal structure, custody arrangements and the outcome of insolvency proceedings.
2. Does India have a dedicated law for crypto exchange insolvency?
India has the Insolvency and Bankruptcy Code, 2016, alongside tax and anti-money laundering provisions relevant to virtual digital assets. However, specific rules addressing ownership, customer asset segregation and recovery during crypto exchange insolvency remain an area requiring greater clarity.
3. What is customer asset segregation in cryptocurrency?
Customer asset segregation means keeping investors’ cryptocurrency separate from an exchange’s own holdings. Proper separation and documentation can help establish ownership and potentially simplify recovery if the exchange fails.
4. Does the IBBI research paper guarantee better protection for crypto investors?
No. A research paper can recommend reforms, but it does not automatically change the law. The level of protection will depend on whether the recommendations are adopted and how the resulting rules are implemented.
