Insolvency of Crypto Exchanges: Treatment of Digital Assets as Estate Property

The collapses of several major exchange and lending companies such as Mt. Gox, Celsius Network, Voyager Digital, FTX, and WazirX, revealed an important problem with insolvency law around the world, there are not clear guidelines to determine whether the digital assets owned by clients are considered part of the “debtors estate” (to be repaid to creditors) or will be considered clients’ own property held by banks in trust/custodial accounts. The purpose of this paper is to answer the question about whether or not a retail customer has their actual bitcoin returned to them or if it is returned to them as an unsecured creditor in a lesser amount than one dollar. This article will explain how “property of the estate” is defined in both U.S. Bankruptcy Laws and IBC Laws and will analyze the different results from Celsius bankruptcy, FTX Bankruptcy, and Voyager Bankruptcy and how this will relate to applicability in India based upon the ruling by Madras High Court in Rhutikumari v. Zanmai Labs Pvt. Ltd. and events surrounding WazirX and Zettai restructuring. The Exchange’s Terms of Use are shown to have been more impactful than any general principle of property law in selecting the jurisdiction of each respective Exchange, resulting in disparate or arbitrary results for retail depositors who holds similar amounts. This article explores multiple potential options for differentiation, including the UCC’s Article 12, the EU’s MiCA Regulation and Singapore’s & New Zealand’s offerings; and provides suggested exclusive amendments to IBC.