Digital Assets in Insolvency Proceedings: Legal Challenges in Valuing and Distributing Cryptocurrencies and NFTs During Bankruptcy

Written by Kamkashi Singh

Table of Contents

• Introduction
  • Understanding Digital Assets in the Context of Insolvency
  • Legal Classification: Property or Something Else?
  • Valuation Challenges
  • Asset Recovery and Custody
  • Distribution and Legal Ambiguity
  • Indian Context and Emerging Frameworks
  • Recommendations
  • Conclusion

Introduction

As the digital economy expands, the role of digital assets—particularly cryptocurrencies and non-fungible tokens (NFTs)—in legal and financial frameworks is growing rapidly. In insolvency and bankruptcy proceedings, these assets pose unique legal and practical challenges. Courts, insolvency professionals, and regulators now face the task of integrating digital assets into existing insolvency laws, which were designed with traditional property and financial instruments in mind.

This article explores the key legal challenges associated with the valuation, classification, and distribution of digital assets in insolvency proceedings, with a special focus on cryptocurrencies and NFTs.

Understanding Digital Assets in the Context of Insolvency

Cryptocurrencies, such as Bitcoin and Ethereum, are decentralized digital currencies that function independently of central banking systems. Non-fungible tokens (NFTs), on the other hand, are unique digital representations of ownership over specific digital or physical assets, typically hosted on blockchain platforms.

In insolvency proceedings, these assets can be part of the debtor’s estate and therefore subject to distribution among creditors. However, their treatment raises several legal questions:

• How should digital assets be classified under existing insolvency laws?
• What is the fair market value of highly volatile assets?
• How can these assets be located, accessed, and liquidated?

Legal Classification: Property or Something Else?

A foundational issue in insolvency is whether digital assets qualify as “property” under law. In many jurisdictions, including India, the insolvency code does not explicitly define or refer to cryptocurrencies or NFTs.

Some courts have taken the view that digital assets are akin to intangible property or commodities. For instance, the UK Jurisdiction Taskforce (UKJT) concluded in 2019 that crypto-assets are capable of being owned and therefore qualify as property. Similarly, some Indian High Courts have recognized cryptocurrencies as “assets” in the context of taxation or enforcement.

However, the lack of statutory clarity in India under laws such as the Insolvency and Bankruptcy Code (IBC), 2016, creates legal uncertainty regarding the treatment of these assets in bankruptcy.

Valuation Challenges

Digital assets are highly volatile. The value of Bitcoin, for instance, can fluctuate by thousands of dollars in a matter of days. NFTs, even more complex, derive their value from perceived uniqueness, scarcity, and market hype—factors not easily assessed using traditional valuation methods.

In insolvency, asset valuation is critical for:

• Determining the total value of the debtor’s estate
• Ensuring equitable distribution among creditors
• Facilitating court-supervised liquidation

Challenges in valuation include:

• Market volatility: Prices can change rapidly, creating timing issues in valuation.
• Lack of standardization: There is no universally accepted method for valuing NFTs or thinly traded tokens.
• Illiquidity: Some digital assets may have little or no market activity, making it difficult to realize their value during liquidation.

Asset Recovery and Custody

A digital asset, by its nature, exists on a decentralized blockchain and is accessible only through private keys. This presents practical challenges:

• Access Control: If the debtor refuses to disclose private keys or loses access, the assets may be irretrievable.
• Custodianship: Insolvency professionals often lack the technical infrastructure or training to securely store and manage digital assets.
• Tracing Assets: In cases of fraud or concealment, tracking crypto transactions through anonymized blockchain networks can be difficult, though not impossible with forensic blockchain tools.

Courts may require specialized digital asset custodians or third-party crypto forensic experts to locate, recover, and manage these assets.

Distribution and Legal Ambiguity

Once digital assets are included in the debtor’s estate, distributing them among creditors raises novel questions:

• Should creditors be paid in kind (e.g., in crypto) or in fiat currency equivalent?
• How should the value be pegged—at the time of insolvency filing, valuation, or distribution?
• Can creditors challenge the valuation due to volatility?

Most jurisdictions prefer liquidation into fiat currency, but with the growth of institutional crypto adoption, some creditors may prefer receiving cryptocurrency directly.

Additionally, cross-border insolvency cases involving digital assets introduce conflict-of-law issues. The decentralized nature of crypto makes it difficult to determine applicable jurisdiction, especially when assets are stored on exchanges in different countries.

Indian Context and Emerging Frameworks

In India, the Insolvency and Bankruptcy Code (IBC) does not currently address digital assets directly. However, given the rising value of crypto holdings among individuals and corporations, there is a growing demand for regulatory clarity.

Recent moves by the Indian government—such as the imposition of tax on crypto transactions (1% TDS under Section 194S of the Income Tax Act) and the classification of virtual digital assets under the Finance Act—suggest an increasing recognition of digital assets in financial law. Nevertheless, insolvency law is yet to catch up.

A legislative or judicial clarification that recognizes cryptocurrencies and NFTs as part of the asset pool in insolvency cases would significantly strengthen legal certainty for stakeholders.

Recommendations

1. Statutory Recognition: Legislatures should amend insolvency laws to explicitly recognize digital assets as property subject to administration and distribution.
2. Standard Valuation Guidelines: Regulatory bodies like the Insolvency and Bankruptcy Board of India (IBBI) can issue valuation guidelines for digital assets to ensure consistency.
3. Digital Asset Custodianship Framework: Courts and insolvency professionals should engage licensed custodians to manage digital assets during proceedings.
4. Training and Capacity Building: Insolvency professionals should be trained in digital asset management and forensics to handle such cases effectively.
5. Cross-border Cooperation: Since digital assets are inherently borderless, India should actively engage in international legal frameworks for crypto asset regulation and recovery.

Conclusion

As digital assets become mainstream, they will increasingly feature in insolvency proceedings. However, without legal clarity and operational readiness, courts and insolvency professionals will struggle to equitably value, manage, and distribute cryptocurrencies and NFTs. Bridging the gap between traditional insolvency law and digital finance requires proactive regulatory reform, judicial innovation, and technical capacity building. Only then can the insolvency system remain fair, inclusive, and effective in a rapidly digitizing economy.