Cryptocurrency is "Property": A Note on Rhutikumari vs. Zanmai Labs Pvt Ltd

A single bench of the Madras High Court has categorically held that crypto currency is “property” under Indian laws.

The ruling came in Rhutikumari vs. Zanmai Labs Pvt Ltd, in the context of a crypto investor seeking to preserve her crypto tokens from being eroded under  a proposed scheme of restructuring in Singapore.

Facts

• In January 2024, the applicant Rhutikumari purchased 3,532.30 XRP coins (a type of cryptocurrency) on WazirX, a prominent crypto exchange platform in India. Zanmai Labs operates the WazirX platform in India. 

• In July 2024, WazirX suffered a major cyberattack resulting in the loss of Ethereum-based crypto tokens (ERC 20 coins). The Applicant's XRP coins were untouched. However, all user portfolios were frozen to prevent further losses and to safeguard the remaining assets.

• Since the platform lacked sufficient tokens to satisfy user claims, Zanmai Lab's Singapore-based parent company, Zettai Pte Ltd proposed a scheme of arrangement for distribution of assets amongst users, overseen by the Singapore courts. The scheme aimed to "socialize" the losses, meaning all platform users (including Rhutikumari) would receive payouts on a proportionate basis. The scheme was approved by the Singapore High Court on 13^th October.

• The applicant and Zanmai Labs were parties to a user agreement which contained a dispute resolution mechanism requiring all disputes to be referred to arbitration under the Arbitration Rules of Singapore International Arbitration Centre (SIAC) with the seat in Singapore. Given this, following the order of the Singapore High Court, the applicant approached the Madras High Court for interim protection under Section 9 of the Arbitration and Conciliation Act, 1996 (A&C Act) to preserve her crypto assets from erosion pursuant to the implementation of the scheme.

The Ruling

To determine whether the applicant was eligible for relief under Section 9 of the A&C Act, it was essential for the Court to examine whether she was a proprietor (owner of specific, identified assets)  in respect of her XRP coin holding, or an investor.

The Court held that cryptocurrency is property, capable of being enjoyed, possessed, and held in trust. It stated that “virtual digital asset held electronically are meant to be held in trust with a fiduciary duty owed to the owners of such asset”. The Court further observed that cryptocurrencies, while intangible, are definable, identifiable, transferable, and capable of exclusive control through private keys, giving them a proprietary character.

The Court noted that (A) whether the action initiated by the Zettai and the scheme of restructuring will bind the applicant in India, and (B) whether the losses of tokens arising from security breach or lapse can be spread across all users of the platform especially when such breach did not impact the applicant’s XRP Coins, were issues to be adjudicated under the user agreement by an arbitral tribunal. Therefore, the court granted the applicant interim protection for preservations of her assets (in the form of a bank guarantee by Zenmai Labs) under Section 9 of the A&C Act.  

On a related note, Zanmai argued that Zettai maintained the wallet infrastructure and crypto operation while Zanmai had no control over those wallets with its role being limited to processing INR transactions through banking channels. However, the Court held that to operate a crypto currency in India the concerned service provider has to be registered as a reporting entity with the Financial Intelligence Unit and that Zanmai was registered as a reporting entity and was therefore, authorized to handle

crypto currency in India. 

Implications

The Madras High Court's decision elevates the legal standing of cryptocurrency to property. This means that the rights of cryptocurrency holders in respect of their tokens are proprietary in nature, rather than merely contractual. Proprietary rights are in rem rights, available against the property itself, whereas contractual rights are in personam rights available against specific individual(s).

Proprietary rights enjoy stronger protection, especially in the event of insolvency. If a person in possession of another person's property becomes bankrupt, such property will not ordinarily become a part of the liquidation estate and the insolvent's creditors will not be able to apply such property to satisfy their claims. This principle is recognised in Section 36(4) of the Insolvency and Bankruptcy Code, 2016 (IBC). In contrast, contractual right holders are treated as unsecured creditors under Section 53 of the IBC. They must recover their claims from the assets of the insolvent, and only after preferred creditors have satisfied their claims. Since cryptocurrency is now recognised as property, if an exchange or custodial wallet becomes insolvent, the owners will be shielded from bankruptcy risk. If cryptocurrency cannot form part of the exchange's liquidation estate, they also should be remote from rebalancing or loss-distribution schemes by exchanges, such as the one at issue in the present case.

Further, a person with proprietary rights (right to possession of specific movable property) can seek recovery of the property itself under Section 7 of the Specific Relief Act, 1953, whereas, a contractual right holder is ordinarily entitled to remedies such as damages for breach or specific performance. Cryptocurrency holders having proprietary rights therein can therefore seek recovery of their coins in scenarios where their rights are interfered with, such as in the case of misappropriation by custodians, or unauthorised transfers.

However, for Rhutikumari, this is only a provisional victory, as it is an interim measure under Section 9 of the A&C Act until the matter is arbitrated. It will be up to the arbitral tribunal to decide whether she would be subject to the Singapore scheme of restructuring initiated by Zettai Pte Ltd and whether her XRP coins would be adjusted for socialising the losses arising from the theft of the ERC 20 coins.