Owners or Creditors: Client-Asset Segregation After the Wazirx Collapse

*Prabhas Kumar and Surya Prakash

In October 2025, the High Court of Singapore sanctioned a scheme of arrangement (“Scheme”) for the crypto exchange platform WazirX (“WazirX”) that treated every account holder of the platform, including even those whose accounts were not compromised, as an unsecured creditor, evenly distributing the losses. In July 2024, hackers drained 45% of user holdings from WazirX, nearly US$234 million. The parent entity, Zettai Pte Ltd (“Zettai”), opted for a restructuring before the High Court of Singapore (“HCS”). Twelve days after the Scheme was sanctioned, the Madras High Court (“MHC”), while hearing a petition seeking interim protection for unaffected holdings from being absorbed into the Scheme, took an opposite view. MHC in Rhutikumari v Zanmai Labs Pvt Ltd (“Rhutikumari”) ruled that the user holdings were their own property, only held in trust by the exchange.

Through this post, we argue that this divergence may not just be an accident involving two forums but is rooted in a deeper inconsistency in Indian law. User funds are only protected while they move through a regulated channel but not when they rest as a balance with a Non-Banking Entity (“NBE”). In the latter limb, we propose a sector-agnostic regime requiring NBEs to segregate user assets. This regime, we contend, is largely achievable through existing regulatory powers.

When Owners Become Creditors: The Approach of the Singapore Scheme

The defining feature of the Scheme is that it socialised the loss. Users whose coins were untouched were nonetheless made to share the shortfall, recast as unsecured creditors of Zettai rather than as owners of identifiable property. HCS sanctioned the Scheme on October 13, 2025, after a re-vote carried by about 95.7 per cent of creditors by number.

The Indian courts have approached the same question differently. In Rhutikumari, the MHC held that cryptocurrency is property capable of being held in trust, that the operator owed fiduciary duties to its users, and that an investor whose holdings were untouched could not be subjected to a socialisation of losses (¶¶ 55-58). The Bombay High Court (“BHC”) had taken the same view in Zanmai Labs v Bitcipher Labs LLP (“Bitcipher”), holding that Virtual Digital Assets (“VDAs”) held electronically are to be held in trust with a fiduciary duty to their owners, and that contract could not authorise socialising the loss.

Several difficulties followed from this divergence. First, the outcome turned on where the dispute was heard, not on who owned the assets; forum, and not ownership, decided recovery. Thereafter, as Zettai was incorporated in Singapore, the restructuring, in its entirety, operated under the Companies Act 1967 and Insolvency, Restructuring and Dissolution Act, 2018 of Singapore. Indian forums thus could only interfere through interim protections. The efficacy of these, as well, was limited to the individual users who went to court, not the wider body of aggrieved account holders. To illustrate, the MHC only protected 3,532 XRP of a single applicant; the implied trust fiction could not displace the Scheme already approved offshore.

The Lacunae in the Existing Frameworks

It shall be of benefit to demarcate what Indian law does protect. The RBI Regulation of Payment Aggregators (“PA”) Directions mandate a non-bank PA to maintain the funds collected on behalf of its merchants in a separate escrow account with any Scheduled Commercial Bank (“SCB”) in India. A PA collects the customer’s payment on a merchant’s behalf and settles it later, holding money that is not its own in the interval. An SCB, being a bank in the Second Schedule to the Reserve Bank of India Act, 1934, falls within the RBI’s direct supervision; the money thus rests with a regulated bank, not the intermediary. The Directions further deem the PA’s payment system a ‘designated payment system’ under Section 23A of the Payment and Settlement Systems Act, 2007. This puts the escrow account in a statutory firewall; at no time is it treated as beneficially the intermediary’s and thus at all times stays secured from the PA’s creditors.

These fences, however, cease once the quantum comes to a rest. The gaps are threefold:

Firstly, balances held with these NBEs are treated as closed-system Prepaid Payment Instruments (“PPIs”), issued by an NBE for buying goods or services from that NBE only, with no cash withdrawal and no third-party settlement. Closed-system PPIs are not classified as a payment system requiring authorisation by RBI and are, therefore, not regulated or supervised by the RBI. The difficulty emanates from the reality that a carve-out designed for low-value gift instruments shelters large lumps of user credits. The draft RBI PPI Directions 2026 concede this flaw and seek to bring marketplace-issued closed-system PPIs under its watch.

Secondly, for VDAs, although the court now recognises them as properties with identifiable beneficiaries, held by NBEs and exchanges under the authority of a custodian, there is no statute to absorb the weight of this structure. Mandatory segregation of accounts, imposition of trusteeship and exclusion from insolvency proceedings need a legislative skeleton.

Thirdly, with the blanket ban on Real Money Games (“RMGs”) effective from 1 May 2026 due to the Promotion and Regulation of Online Gaming Act, 2025 (“PROGA”), the money still stuck with banned RMG platforms is now frozen. These firms are insolvency-prone; their own creditors will look to the same pool, and the user has no real safety here, because that money was never kept separate from the firm’s funds.

Section 53 “Waterfall” under the Insolvency and Bankruptcy Code, 2016 (“IBC”) further agonises the user.

A retail user of a gaming or crypto-exchange NBE, to whom a wallet balance is owed, qualifies neither as a secured creditor nor as a financial creditor. That outstanding balance is thus more likely to be an operational debt, ranked among the lowest tiers of the distribution waterfall, below the costs of the process, the secured creditors and workmen, the employees, the financial creditors, and the dues of the government. Section 36(4)(a) does exclude third-party assets held in trust from the liquidation pie, which might be of assistance, but such is contingent on the existence of a prima facie trust. Absent the same, a user must establish a trust from first principles in every case, thus turning recovery into a game of which forum acts quicker.

It bears emphasis that this asymmetry is not a considered choice. To draw an analogy, the Securities and Exchange Board of India (“SEBI”) already makes stockbrokers sweep idle client money up to clearing corporations every day, parked in designated accounts and kept apart. So, segregation is nothing new to Indian finance. That crypto trade as a lawful activity is settled, the Supreme Court having set aside the banking ban on the ground of proportionality in Internet and Mobile Association of India v RBI. The silence on non-bank platforms is better explained as oversight than as a principled exception.

What Should a Segregation Regime Look Like?

Our proposal proceeds on two tracks.

The first route operationalises the status quo. Aggrieved users would have to follow Bitcipher and Rhutikumari and establish three things. First, that their holdings are third-party trust property, of which they are the identifiable beneficiaries, and the same is held by the NBE as a custodian. Section 6 of the Indian Trusts Act, 1882 demands reasonable certainty as to the trust property, which a pooled wallet rarely offers, and in IFFCO Tokio General Insurance Co Ltd v Cox & Kings Ltd, the National Company Law Tribunal held that a clause declaring monies to be held in trust did not make them so without a separate trust or retention account (¶ 5). Second, that under Section 36(4)(a) of IBC, such assets are excluded from the liquidation assets for being third party assets held as a trustee, a protection the Explanation to Section 18 carries into the resolution process. Third, that the user’s deposit, made before any offence, was never the platform’s property and thus bears no attachment to proceeds of crime under Section 2(1)(u) of the Prevention of Money Laundering Act, 2002, which, after Vijay Madanlal Choudhary v Union of India, reaches only property derived from criminal activity relating to a scheduled offence.

The second track proposes substantive reforms. The RBI should require every NBE that holds pooled user value above a defined threshold to maintain a designated, segregated account with an SCB; to treat that balance as held on a statutory trust from registration. Further, stipulating a threshold may spare small platforms, and segregation will bind only at the point of failure rather than in ordinary use.

The comparative experience supports each element. In the European Union, the Markets in Crypto-Assets Regulation (“MiCA”) makes segregation a licensing condition. Article 70 requires a crypto-asset service provider to safeguard clients’ ownership rights, particularly in insolvency, and to place client funds with a credit institution; Article 75 requires it to maintain a register of each client’s positions, to segregate client holdings from its own on the distributed ledger, and not to use client assets for its own account. Since December 2024, custodied assets have been insulated from the provider’s estate, so that its creditors have no recourse to them.

Two episodes abroad illustrate both what segregation achieves and what its absence costs. In In re Celsius Network LLC (“Celsius”), the United States Bankruptcy Court held that, under the platform’s terms of use, customers had transferred title to their deposits to the firm; roughly 600,000 “Earn” account holders, with about US$4.2 billion collectively, accordingly became unsecured creditors recovering only a pro-rata share. The assets sitting in the platform’s segregated Custody programme were a different story. These were treated as the customer’s own, not as estate property. That contrast does the work here: one firm, two kinds of accounts, and only the segregated users walked away still owning what was theirs. New Zealand got to the same place, though by trust and not by any statute. In Ruscoe v Cryptopia Ltd (in liq) (“Ruscoe”), the High Court held that the cryptocurrencies of a collapsed exchange were intangible property, capable of being held on trust (¶ 69). The trust being made out, the coins were treated as held for the accountholders, kept outside the liquidation estate, and returned to them rather than thrown into the pool for general creditors.

It is obvious to anticipate the objection that in such nascent sectors, a mandate of asset segregation might turn out to be a detrimental intervention, particularly when the courts have already supplied the “Trust” formula. However, the mandate is neither novel nor egregious; SEBI has already put force to it without primary legislation, and the European market shows it does not impede ordinary operations. The relief granted by the court will only be limited to the litigant, in personam.

Conclusion

Less of an isolated misfortune, WazirX was the predictable result of regulating user holdings in a sector-specific scheme whilst ignoring pooled NBE custody at scale. SEBI already upstreams client money at home; MiCA segregates it abroad; and the law of trust is there to tie the two together. What remains is the application, to bring them to bear on NBEs before the next failure. Until that happens, practitioners and observers alike will have to keep watching users discover, at the very point of collapse, that a balance they believed their own was never more than an unsecured claim.

• The authors are a Second Year, B.A. LL.B. (Hons.) student at Gujarat National Law University (GNLU), and a Third Year, B.A. LL.B. (Hons.) student at National Law University Odisha (NLUO).