In a legal landscape marked by regulatory ambiguity and legislative inaction, the Indian judiciary has once again stepped in to provide clarity on the burgeoning world of Virtual Digital Assets (VDAs). The recent judgment of the Madras High Court in Rhutikumari v. Zanmai Labs emerges as a crucial judicial intervention and offers a significant pronouncement on the nature of cryptocurrencies and the rights of Indian investors, shaping the discourse in a field where legislative action has been conspicuously absent. The decision, while focused on providing interim relief to a single investor, has profound implications for the millions of Indian VDA users navigating a market that the government taxes but refuses to formally regulate. Beyond interim relief, the judgment symbolizes the judiciary’s role as a constitutional counterweight in shaping digital-era rights. It is a classic case where persistent legislative inaction has compelled the courts to intervene to maintain constitutional equilibrium.

The Crypto Conundrum: A History of Legislative Inaction

India's relationship with cryptocurrency has been tumultuous, characterized by a persistent legislative and regulatory vacuum. The journey began with cautionary warnings from the Reserve Bank of India (RBI) as early as 2013, highlighting risks associated with security, consumer protection, and potential use for illegal activities. This culminated in the RBI's circular of 6 April 2018, which prohibited regulated entities from providing banking services to crypto-related businesses, effectively severing their lifeline to the formal financial sector.

The crypto industry found relief in the landmark decision of the Supreme Court in Internet and Mobile Association of India v. Reserve Bank of India (2020) 10 SCC 274, which struck down the RBI's circular. The Court held that while the RBI had the power to regulate, the absolute prohibition was a disproportionate measure, especially since the RBI could not demonstrate any actual harm caused to its regulated entities by crypto exchanges.

Despite this judicial directive for a calibrated approach, the legislative and executive branches have remained inert. While the crypto space in India is unregulated, VDA’s are defined under the Income Tax Act, 1961 and are taxed by the government. Building on the definition under the tax statute, the Government of India has brought VDAs under the purview of the Prevention of Money Laundering Act, 2002 (PMLA) and crypto exchanges now have to register as a reporting entity with the Financial Intelligence Unit and report any suspicious transactions.

The Enforcement Directorate has also been attaching VDAs as ‘proceeds of crime’ under the PMLA, implicitly acknowledging their value. This leads to an interesting situation where crypto while being completely unregulated is taxed while being subject to money laundering laws and in fact even attached as a ‘property’ by the Enforcement Directorate. This policy ambivalence is a result of what the government perceives to be a lack of global coordination on the issue of crypto regulation. While the government has made some attempts to regulate crypto in India in the past, none of those saw the light of day.

Proposed legislations, such as the 'Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019' and the 'Cryptocurrency and Regulation of Official Digital Currency Bill, 2021', have lapsed without seeing the light of day. Instead, the government introduced a stringent tax regime, imposing a 30% tax on gains and a 1% tax deductible at source on all trades, creating a peculiar situation where the industry is taxed heavily but remains unprotected by any formal legal framework. This inaction leaves millions of Indian users vulnerable to fraud, cyberattacks, and the insolvencies of global exchanges.

"Neti, Neti": The Madras High Court's vedantic quest to define cryptocurrency and empower the Indian Investor

It is against this backdrop that the Madras High Court's decision in Rhutikumari emerges as a crucial development. The case involved a petitioner whose crypto assets on the WazirX platform were frozen by the exchange after a cyber-attack, preventing her from trading or liquidating her holdings. The Court had to decide two key issues: its jurisdiction to grant interim relief and the fundamental nature of the applicant's crypto holdings.

1. Jurisdiction of Indian Courts

The court held that an application under Section 9 of the Arbitration and Conciliation Act, 1996, was maintainable before an Indian court, even if the arbitration was seated in Singapore. By reasoning that the applicant's assets were held and operated from India through her mobile phone, the court established a crucial precedent for protecting assets located within India's economic territory. This finding is a significant victory for user protection, ensuring that Indian investors are not left without a remedy simply because an exchange's corporate structure or dispute resolution clause points to a foreign jurisdiction.

2. The Nature of Cryptocurrency: An asset, not just an idea

At the heart of the matter lies a question that has vexed regulators and jurists worldwide: What exactly is a cryptocurrency? The High Court, echoing the Supreme Court's observation in Internet and Mobile Association of India v. Reserve Bank of India, invoked the Vedic concept of "neti, neti" ("not this, not that") to describe the difficulty in defining this new-age digital phenomenon. The court acknowledged that "currency" is a misnomer, as its value is determined not by a sovereign but by the consensus of a willing buyer and seller. Similarly, calling it a digital "asset" is not a straightforward classification. The High Court in its judgment carefully distinguished crypto as property, not currency, resolving an interpretive impasse that regulators and courts globally face. The judgment defines crypto’s legal nature through its functional characteristics — it can be owned, transferred, and held in trust — rather than sovereign recognition.

This definitional ambiguity has allowed for a prolonged state of regulatory inertia. While other jurisdictions have taken decisive, albeit divergent, paths—El Salvador embracing Bitcoin as legal tender, China imposing an outright ban, and the US grappling with classifications of crypto as commodities or securities—India has remained in a state of suspended animation.

To resolve this conundrum, the Court embarked on a comprehensive survey of global jurisprudence on this issue and after analyzing these global precedents, affirmed the growing judicial consensus that cryptocurrencies, despite their intangible and novel nature, are to be treated as property.

The key takeaways of the judgment are:

  • Recognition of crypto as "Property": For the purpose of granting interim relief, the court treated the user's crypto holdings as an "asset." This aligns with the approach taken by courts in the UK, Singapore, and New Zealand, which have recognized cryptocurrencies as a form of intangible property capable of being owned and held in trust. This judicial recognition is a vital first step towards building a framework for legal remedies. The court also ‘legitimized’ cryptocurrencies by observing that in Indian law regime, they are treated as VDA and not as a speculative transaction as it is defined and recognized in the statute book.
  • VDAs are held in trust by crypto exchanges: The Madras High Court while placing reliance on a decision of the Bombay High Court in Zanmai Labs Private Limited Vs. Bitcipher Labs LLP held that crypto exchanges hold VDAs in trust and have a fiduciary duty to the owners of such asset. The Madras High Court held that digital tokens stored on platforms like WazirX are “meant to be held in trust,” imposing a duty of care that survives contractual fine print or technical failures.
  • Corporate Governance and Prudential Standards for Web3 service providers: The Madras High Court has held that crypto exchanges should be subject to the same standards of corporate governance and prudential standards as banks as they also deal with investor funds. The Madras High Court observed that courts have become the central stage where the future of digital value is debated where each ruling shapes a clearer picture of the rights, responsibilities and trust in the age of decentralization.
  • A Nudge to the Legislature: The judgment is a powerful statement on the consequences of a regulatory void. By stepping in to craft a remedy where none formally exists, the court has highlighted the urgent need for a comprehensive legal framework. The judgment nudges the legislature to seize the opportunity to design a regulatory framework that encourages innovation whilst protecting consumers and maintaining financial stability.

Perhaps the most profound aspect of the judgment apart from recognizing VDA as property lies in its recognition that crypto exchanges hold users’ assets in a fiduciary capacity. The finding that crypto exchanges hold VDAs in trust and owe a fiduciary duty towards owners of such assets would have sweeping implications. If Indian courts continue to hold that exchanges are custodians—not mere facilitators—investors may have enforceable proprietary claims even during insolvency or hacking incidents.

The Rhutikumari ruling may well be remembered as the “Genesis Block” of India’s crypto jurisprudence. By declaring crypto to be property, the judiciary has built the legal foundation lawmakers have long avoided.

Whether Parliament now acts to transform this judicial clarity into a coherent regulatory framework will determine India’s stance in the global digital economy. The message is clear: India must move from passive taxation to proactive, intelligent regulation—balancing innovation, consumer protection, and financial stability.

Authors:

Abhinav Sharma, Partner

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