Madras High Court’s Landmark Ruling: Cryptocurrencies Recognized as Property
In an unprecedented move, the Madras High Court has declared that cryptocurrencies can be classified as property. This pivotal decision could significantly alter the way crypto exchanges manage and protect user assets, particularly in the aftermath of hacking incidents.
Understanding the Legal Standing of Cryptocurrencies as Property
The court determined that crypto-assets fulfill the essential criteria of property ownership due to their ability to be owned, transferred, and managed via private keys. Justice N. Anand Venkatesh emphasized that while cryptocurrencies are not tangible goods or traditional currency, they qualify as property and can be held “in trust.” This ruling partially draws from the definition of “virtual digital asset” in Section 2(47A) of the Income Tax Act.
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The WazirX Breach and Its Ramifications
On July 18, 2024, WazirX experienced a significant security breach, resulting in the compromise of its cold wallet and the theft of approximately $230 million in Ethereum and ERC-20 tokens. In response, a WazirX user, who had 3,532 XRP valued at around ₹1.98 lakh as of January 2024, sought court intervention to safeguard her holdings from being absorbed into any collective compensation scheme for the stolen assets. The court upheld her claim, distinguishing her XRP from the hacked tokens.
Court’s Rejection of Arbitration Obstacle
WazirX’s stance was that disputes should be resolved through arbitration in Singapore, as per their agreements. However, the court dismissed this argument due to the transactions’ direct connections to India, including the use of Indian bank accounts and the exchange’s registration within the country. Thus, the Madras High Court retained jurisdiction, granting interim relief to prevent the user’s XRP from being included in the hack loss compensation.
Impact on Crypto Users and Exchanges
This landmark judgment offers a robust legal foundation for individual users to bring legal actions against exchanges within Indian courts if they believe their funds have been mismanaged or exploited. Additionally, exchanges may need to implement more stringent record-keeping practices, ensure clearer segregation of client funds, and establish direct audit trails. The technical attributes of cryptocurrencies—such as transferability, identifiability, and exclusive control—were cited by the judges as supporting evidence for recognizing legal ownership.
Future Taxation and Legal Implications
Tax experts are closely observing the ruling’s implications. Aligning the treatment of cryptocurrencies as property with existing tax laws regarding virtual assets could influence how gains and transfers are taxed in the future. Although this decision by a High Court carries significant authority, it remains subject to appeal and further review by higher courts. While the judgment secures the specific XRP holdings in this case, additional legal challenges involving other users and different tokens may arise.
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