Cryptocurrency As Property: Business And Legal Implications Of The Madras High Court Ruling

1. Introduction

Cryptocurrencies and digital assets have moved beyond speculation to become tangible instruments of business transformation. They enable faster cross-border settlements, enhance liquidity management, and offer innovative tools for financing and asset tokenisation. However, until recently, ambiguity in India's legal framework left corporations uncertain about how to account for, protect, and report such assets.

The Madras High Court's decision in Rhutikumari vs Zanmai Labs Pvt. Ltd. marks a pivotal shift. The court recognised cryptocurrencies as property under Indian law, establishing that users hold identifiable ownership rights and that exchanges or intermediaries cannot redistribute or repurpose these holdings without consent. Crucially, it affirmed that Indian courts retain jurisdiction under Section 9 of the Arbitration and Conciliation Act, 1996, even where arbitration is seated overseas, ensuring domestic enforceability of digital asset rights.

This recognition positions digital assets as a legitimate component of corporate balance sheets, investment portfolios, and treasury strategies. The ruling transforms cryptocurrencies from speculative exposure to a regulated, protectable, and governable asset class.

2. How is Digital Asset modifying the paradigm for corporations?

Digital assets, encompassing cryptocurrencies, stablecoins, non-fungible tokens (NFTs), and tokenized securities, are revolutionizing the domain of corporate finance and business operations.

1. Treasury Management: Corporations are increasingly integrating digital assets into their treasury management strategies to diversify sources of liquidity, optimize capital efficiency, and act as potential safeguards against inflation within their financial portfolios.
2. Cross-Border Transactions: The adoption of cryptocurrency-based settlement systems enables expedited and more economical cross-border monetary transactions, thereby markedly diminishing remittance expenses and processing durations, particularly for enterprises engaged in trade-centric sectors such as manufacturing, information technology, and logistics.
3. Tokenised Fundraising: The implementation of blockchain technology facilitates groundbreaking fundraising methodologies by permitting fractional ownership of assets, the tokenisation of debt instruments, and decentralised financing frameworks, all underpinned by verifiable and transparent audit trails that bolster investor confidence and regulatory scrutiny.
4. Customer Engagement: The deployment of loyalty and reward tokens significantly enhances customer retention and fortifies brand affiliation by cultivating sustained engagement within a company's ecosystem, thus promoting repeated interactions and the creation of long-term value.
5. Supply Chain Visibility: The utilisation of blockchain-based tokens elevates end-to-end transparency throughout the supply chain by allowing for precise traceability of goods, streamlined inventory management, and comprehensive compliance reporting, consequently enhancing accountability and operational effectiveness.

Across various sectors, including financial technology, retail, and infrastructure, digital assets are transitioning from experimental applications into essential operational tools that promote efficiency, transparency, and scalability. This evolution is in alignment with the overarching global trend toward digitalisation and enterprise innovation.

3. Implication of the Madras High Court Ruling

1. Asset Recognition and Governance: The judgment provides a formal acknowledgment of digital assets as a distinct category of intangible property, thereby providing enterprises with a definitive legal foundation to possess, transfer, and document them in accordance with established accounting and governance frameworks. Organizations are now enabled to classify cryptocurrencies within recognized asset categories and formulate accounting policies that align with fair-value or cost-based methodologies, thereby ensuring transparency and regulatory compliance.
2. Fiduciary and Custodial Accountability: Exchanges and custodians are now subject to heightened expectations regarding governance, asset segregation, transparency of custody arrangements, and the safeguarding of user assets. The court has indicated that the holdings of users must not be treated as a collective pool to offset losses incurred by other users. For business models predicated on the pooling or risk-sharing of digital-asset holdings, this ruling signifies an escalation of legal risk. For institutional investors or corporate treasuries in possession of crypto-assets, custody arrangements (whether internally managed or through third-party entities) must be meticulously structured to acknowledge that these assets constitute property and may be subject to trust or fiduciary frameworks.
3. Legal Certainty in Disputes: The court has confirmed that Indian courts, pursuant to Section 9, possess the authority to grant interim relief notwithstanding foreign-seated arbitration in cases where Indian assets or causes of action are implicated. For contracts designated with an overseas seat, this stipulates that businesses should evaluate the risk associated with Indian jurisdiction. In the formulation of user agreements, provisions concerning the freezing, redistribution, and restructuring of crypto holdings have become legally significant. Clauses that purport to pool losses or reallocate user assets may be subject to challenge under property rights. Enterprises should undertake an assessment of the implications when an exchange experiences a breach or hack; the methodology for asset segregation; the rights afforded to use and the jurisdictional protections that are in place.
4. Compliance, Accounting, and Taxation: The synchronization of this ruling with the classification of Virtual Digital Assets (VDAs) under the Income Tax Act emphasizes the imperative for proactive and transparent financial disclosures. Organizations should establish comprehensive internal frameworks that govern valuation methodologies, audit documentation, and tax compliance to ensure adherence to statutory obligations and to mitigate the potential risks of penalties or regulatory intervention.
5. Strategic and Competitive Advantage: Businesses are compelled to reassess their asset-custody frameworks, user-asset segregation protocols, terms and conditions, dispute-resolution mechanisms, cross-border arbitration strategies, and liability concerning hacks or losses. This ruling bestows legitimacy upon cryptocurrency business models, indicating that Indian courts acknowledge the legal enforceability of cryptocurrency holdings. Such recognition may foster institutional adoption, corporate treasury management, and partnerships within the fintech sector. For startups and SaaS enterprises engaged in tokenization, blockchain services, exchanges, or custody solutions, this legal clarity serves as a favourable indication for investors and potential partners.

4. What businesses should be careful about?

1. Custody and Segregation: It is imperative to distinctly articulate asset ownership frameworks and custody arrangements. One must ensure that digital assets are retained in trust or under analogous fiduciary structures, with appropriate documentation to substantiate segregation. Assets are to be neither transferred nor reallocated without the explicit consent of the beneficial owner or as specifically authorized under contractual stipulations.
2. Update Governance and Compliance Systems: Synchronize the management of digital assets with thorough internal audit protocols, anti-money laundering (AML) and know-your-customer (KYC) mandates, as well as resilient information security infrastructures. Conduct regular evaluations to assess the efficacy of these controls, thereby ensuring organizational resilience against operational disruptions and cybersecurity vulnerabilities.
3. Revise Contracts and Risk Allocation: Execute a thorough examination of contractual arrangements with exchanges, custodians, and fintech collaborators to ascertain that asset segregation obligations are unequivocally defined, dispute resolution mechanisms are transparent and enforceable, and risk-sharing or loss management provisions are articulated with precision to safeguard both corporate and client interests.
4. Enhance Financial Reporting: Articulate digital asset holdings within financial statements, supplemented by comprehensive valuation methodologies and pertinent disclosures. Implement internal protocols to guarantee accuracy, audit preparedness, and conformity with applicable accounting standards, while providing finance professionals with specialized education on the recognition, measurement, and reporting of digital assets.
5. Engage with Regulators and Stakeholders: Sustain proactive dialogue with regulatory authorities, policy-making entities, and industry associations to bolster the formulation of comprehensive governance frameworks for digital assets. Actively participate in consultative processes and collaborative initiatives to anticipate regulatory advancements and align corporate strategies with evolving compliance and policy standards.
6. Educate Leadership and Boards: Cultivate a profound comprehension among organizational leaders and board members regarding blockchain technology, digital finance systems, and cybersecurity compliance obligations. Such knowledge will facilitate judicious strategic decision-making, enhance oversight capabilities, and ensure that corporate governance frameworks remain congruent with the ever-evolving landscape of digital assets.

5. Way Forward

Presented herein are proposed measures for enterprises (inclusive of those providing cryptocurrency services and those utilizing crypto assets) to conform with this ruling and to ready themselves for the transforming environment:

1. Legal & Compliance Review: Conduct a thorough legal examination of all crypto-asset contracts, custody agreements, user agreements, and smart contracts to ascertain their alignment with the property status of tokens. Evaluate jurisdiction and dispute-resolution provisions for potential cross-border exposure, with particular attention to access points within India. Catalog the assets that are held or offered whether they are beneficially owned by users or maintained by the platform? Who serves as the fiduciary or custodian?
2. Custody & Risk Framework: Establish a robust custody infrastructure: segregated wallets, governance over private keys, user-segregated holdings, and a clearly defined chain of responsibility. Formulate incident response plans for security breaches or hacks: user notification protocols, asset freeze/unfreeze procedures, compensation policies, and restructuring frameworks that are aligned with legal rights. Contemplate the incorporation of user-asset insurance or guarantee options, or bank guarantee/escrow features, as evidenced in the case where the court mandated an escrow or bank guarantee.
3. Corporate Treasury & Usage Strategy: If an enterprise possesses cryptocurrency assets (including treasury, payment, and tokenization), it is imperative to acknowledge them on the balance sheet as a category of property or asset taking into account aspects such as valuation, impairment, auditing, and disclosure obligations. Formulate a comprehensive policy delineating the utilization of cryptocurrency assets: encompassing custody, conversion, hedging strategies, and risk mitigation measures. Collaborate with taxation consultants regarding the classification of Virtual Digital Assets (VDAs) (which are acknowledged under Section 2(47A) and are subject to a uniform tax rate of 30% on gains, among other considerations).
4. Contracting and User Terms: Amend user terms to articulate the unequivocal rights of users: ownership of cryptocurrency holdings, elucidation on the processes of freezing and redistribution, and the approval protocols for any restructuring initiatives. Assess both internal and external mechanisms for risk-sharing: for instance, provisions that permit an exchange to absorb the losses of certain users while recuperating from others may presently be exposed to vulnerabilities. Ensure the inclusion of transparency: delineate how user assets are segregated, the manner in which they are utilized, and the procedures that ensue in the event of insolvency, hacking incidents, or exit strategies.
5. Engage with Regulators and Stakeholders: Maintain vigilance over regulatory advancements within India: the judicial recognition by courts could expedite the formal regulation of digital assets, encompassing licensing, custodianship, and exchanges. Collaborate with banking institutions, fintech entities, and legal advisors to ascertain how cryptocurrency assets can be integrated within the prevailing financial services framework. Clearly articulate to investors and customers the evolving rights landscape and the protective measures your enterprise provides.
6. Strategic Positioning & Innovation: Leverage this legal clarity as a distinctive competitive advantage: platforms that prioritize user asset rights, maintain transparent custody, and uphold institutional-grade governance may be more likely to attract corporate and institutional clientele. Investigate the provision of tokenization services: considering that cryptocurrency assets are classified as property, business models focused on tokenized real-world assets and digital securities may experience significant growth. Forge partnerships with custodians, compliance firms, and insurance providers to establish high-trust ecosystems.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.