India's digital asset markets have reached an inflection point where economic activity has outpaced institutional clarity. Millions of Indians participate in crypto markets, exchanges process meaningful daily volumes, and compliance expectations around taxation and anti-money laundering are steadily converging with global norms. Yet one critical question remains unresolved: How are Indian users protected when a digital asset platform fails?
India's digital asset ecosystem stands at a pivotal inflection point. Despite significant retail adoption and rising trading volumes, the country continues to operate without a comprehensive regulatory framework for cryptocurrencies. Hence, one critical question remains unresolved: How are Indian users protected when a digital asset platform fails?
During the 2025 winter session of Parliament, Rajya Sabha MP Raghav Chadha highlighted the need for a law on tokenization. It is encouraging to see that in 2026, this momentum is slowly shifting the narrative in the right direction.
Recent regulatory action has focused, appropriately, on financial integrity. The Financial Intelligence Unit-India's enhanced AML and CFT guidelines now require crypto service providers to meet standards comparable to traditional financial institutions, including governance disclosures, transaction monitoring, and board-level accountability. Starting April 2027, India will begin sharing and receiving crypto transaction data with other jurisdictions under the Organisation for Economic Co-operation and Development's Crypto-Asset Reporting Framework (CARF). 172 countries are signatories to the CARF framework. Offshore trading will no longer mean offshore opacity.
These measures strengthen oversight and reduce systemic abuse. However, they do not address what is arguably the most consequential policy gap in the sector, which is investor protection and recovery architecture in distress or insolvency scenarios.
This gap is not theoretical. Cyber incidents, operational failures, and market dislocations have repeatedly tested user confidence. In the absence of clear statutory safeguards governing custody, asset segregation, and insolvency treatment for digital assets, recovery outcomes remain uncertain. Trust, once lost, is difficult to restore especially in markets built on technology rather than sovereign guarantees.
Insolvency Law Meets Digital Assets
India's Insolvency and Bankruptcy Code (IBC) illustrates the challenge. Recovery outcomes depend on whether customer assets held by an exchange are legally treated as trust property or as unsecured contractual claims. The distinction is decisive. Under a contract-centric interpretation, users become unsecured creditors subject to liquidation waterfalls, often resulting in negligible recovery. Under a trust-based framework, customer assets are excluded from the liquidation estate and recoverable in full.
At present, judicial precedent on this question is limited. Until clarity emerges either through legislation or case law, digital asset users remain exposed to outcomes that are both unpredictable and misaligned with reasonable expectations of custody. In such an environment, market-led mechanisms that improve transparency and recovery outcomes merit serious policy attention.
Recovery Tokens as Market-Led Response
One such mechanism is the use of recovery tokens, a blockchain-native instrument designed to represent users' approved claims following a platform distress event. Rather than relying solely on prolonged legal processes, recovery tokens convert static recovery claims into transparent, programmable digital instruments that can be tracked, transferred, or redeemed over time.
From a policy perspective, the relevance of recovery tokens lies not in their novelty, but in the problems they attempt to solve. They introduce liquidity into otherwise frozen user assets, provide verifiable on-chain evidence of recovery progress, and align user outcomes with the operational rehabilitation of the platform. In doing so, they address a trust deficit that regulation has yet to fully confront.
WazirX as Case Study in Execution
WazirX's recent restructuring offers a practical illustration. Following a significant cyber incident, the platform implemented a recovery token framework as part of a larger court-approved scheme. Under the Scheme, eligible users received 85% funds with the restart of the platform in late 2025. For additional recoveries, users received tokens on a pro rata basis within defined timelines, preserving proportional participation tied to future profits of the platform. The structure incorporates periodic assessments and buybacks funded by a portion of operational profits, directly linking platform performance to user recovery.
Notably, this approach did not rely on regulatory compulsion. It was a voluntary, market-driven response to a crisis of confidence. Trading activity resumed, operational revenues were transparently tied to recovery, and users were given agency rather than indefinite uncertainty. While no recovery model is without risk, the framework demonstrates how accountability can be engineered even in the absence of bespoke regulation.
Why This Matters for Policymakers
Globally, traditional insolvency systems have struggled to accommodate the speed and complexity of digital asset markets. The delayed resolution of cases such as Mt. Gox underscored the limitations of legacy processes, while crypto-native responses most notably Bitfinex's tokenized recovery after its 2016 hack demonstrated alternative pathways to restitution.
For Indian policymakers, recovery tokens present an important question: should market-led recovery mechanisms be ignored, discouraged, or studied as potential templates for future regulation? As India considers broader frameworks for digital assets, there is an opportunity to move beyond binary debates of "ban versus regulate" and engage with the design of recovery, custody, and insolvency standards that reflect technological realities.
Recovery tokens are not a substitute for regulation. They do not resolve questions around securities classification, taxation, or consumer risk on their own. But they do offer insight into how transparency, programmability, and incentive alignment can be embedded directly into market infrastructure, often more effectively than post-hoc legal remedies.
Towards More Resilient Digital Asset Market
India's digital asset ecosystem will mature not by avoiding failures, but by developing credible, repeatable responses to them. WazirX's experience suggests that recovery mechanisms grounded in transparency and economic alignment can play a constructive role in rebuilding trust.
For policymakers, the lesson is not to endorse any single model, but to recognize that investor protection in digital markets must address recovery as seriously as it addresses compliance. As regulatory frameworks evolve, mechanisms like recovery tokens deserve consideration not as loopholes, but as early experiments in designing resilience for programmable markets.
The article has been authored by Sharat Chandra, founder of EmpowerEdge Ventures.
Disclaimer: The views expressed in this article are solely those of the author and do not necessarily reflect the opinion of NDTV Profit or its affiliates. Readers are advised to conduct their own research or consult a qualified professional before making any investment or business decisions. NDTV Profit does not guarantee the accuracy, completeness, or reliability of the information presented in this article.
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