Author: Sakshmit Mathur, Amity Law School, Noida
Abstract
The surge in corporate interest in cryptocurrency, particularly in Bitcoin and stablecoins, has led companies worldwide to consider or actually incorporate crypto assets into their financial portfolios. Although such digital assets have the potential of bringing in huge returns and the ability to be diversified, they are also associated with unseen complexity in terms of legal and accounting challenges. This article explores the multifaceted risks associated with the inclusion of crypto assets on corporate balance sheets, including regulatory ambiguity, fiduciary duties, volatility, audit challenges, and disclosure obligations. Through a detailed discussion supported by statutory references, accounting standards, and relevant case law, the paper offers a critical analysis and outlines potential legal pathways and regulatory suggestions for addressing this emergent issue.
Introduction
The digitization of the global economy has pushed the boundaries of corporate finance, and nowhere is this more evident than in the increasing presence of cryptocurrency—or more accurately, crypto assets—on corporate balance sheets. Whether as an investment class, a treasury reserve asset, or a medium of exchange, crypto assets have piqued the interest of both multinational corporations and emerging tech startups.
However, this enthusiasm is tempered by considerable legal and accounting uncertainties. Legal systems around the world struggle to categorize and regulate these assets, while financial reporting frameworks remain misaligned with the underlying economic reality of crypto holdings. This friction raises pivotal questions: How should crypto assets be valued and disclosed? Are current audit standards sufficient for such volatile instruments?
This article aims to dissect these challenges, examine the current legal and accounting landscape, and suggest reforms for a more coherent integration of crypto assets into corporate financial systems.
To the Point: The Legal and Accounting Challenges
1. Legal Categorization and Ambiguity
Crypto assets are notoriously difficult to categorize under traditional legal and financial systems. The Reserve Bank of India (RBI), in its earlier circulars, discouraged banks from facilitating crypto-related transactions, a stance partially invalidated in the landmark Supreme Court judgment of Internet and Mobile Association of India v. Reserve Bank of India (2020).
Globally, jurisdictions differ on how they define crypto assets:
Commodity (U.S. Commodity Futures Trading Commission)
Security (U.S. SEC in some cases like Ripple Labs)
Property (IRS in the U.S. for tax purposes)
Virtual currency (European Central Bank and FATF)
This lack of uniformity makes it challenging for corporations to frame internal policies and comply with relevant regulatory regimes, especially if they operate cross-jurisdictionally.
2. Accounting Standards and Valuation Dilemmas
Under International Financial Reporting Standards (IFRS) and Indian Accounting Standards (Ind AS), crypto assets are not explicitly defined. Most accountants treat them as intangible assets under IAS 38, which does not permit fair value revaluation unless there’s an active market. This often leads to a mismatch between the market value and book value of crypto holdings.
Key accounting issues include:
Valuation volatility: Crypto prices are highly fluctuating.
Impairment testing: If treated as intangible, the asset is subject to impairment without the ability to reverse gains.
Lack of consistency: Some firms use historical cost; others may attempt to use fair value models without standardized backing.
3. Corporate Governance and Fiduciary Duties
The directors should be vigilant and careful in the management of assets. Investing corporate funds in high-risk assets like cryptocurrency raises questions about the breach of fiduciary duties under the Companies Act, 2013, especially Section 166 (Duties of Directors).
A director who authorizes such an investment without adequate due diligence or risk assessment may be held personally liable under derivative actions initiated by shareholders.
4. Audit and Disclosure Challenges
Auditing crypto holdings poses technical and procedural difficulties:
Proof of ownership: Crypto wallets may be anonymously held; auditors must verify the private key ownership.
Existence and valuation: Chain forensics and third-party confirmations are often necessary.
Disclosure requirements under Schedule III of the Companies Act, 2013 now mandate reporting of crypto holdings by Indian companies, but ambiguity persists in how much detail is required.
Use of Legal Jargon
Ultra Vires: Investments in crypto assets made beyond the object clause of the Memorandum of Association may be considered ultra vires and void ab initio.
Fiduciary Duty: Directors hold fiduciary obligations toward the company and shareholders and must act in good faith and in the best interest of the company.
Constructive Trust: In the event of crypto theft, directors may be construed to be holding the lost assets in a constructive trust for the company, raising potential personal liability.
Material Adverse Effect (MAE): M&A contracts involving companies with crypto assets may include MAE clauses specifically addressing volatility in digital asset valuations.
The Proof: Legal Authorities and References
Companies Act, 2013
Section 129: It deals with financial statements. It requires that the financial statements issued by a company should give a true and fair view of the affairs of the company, trounce the accounting standards which are applicable, and is prepared following the form provided in the Schedule III of the Act. In addition, it also makes companies having subsidiaries prepare and present a consolidated financial statement together with the standalone financial statements of the parent company.
Section 134: It focuses on the financial statements, board’s report, and other related disclosures that a company must prepare and submit annually. It outlines the process for approving and signing financial statements, the content of the board’s report, and the consequences for non-compliance.
Section 166: It outlines the duties of directors of a company in India. These duties include acting in good faith, promoting the company’s objects, exercising due care and diligence, avoiding conflicts of interest, and not assigning their office. In effect, directors are given the mandate to take the best interests of the company and its stakeholders but with the ethical standards in mind.
RBI Circular (2018) and subsequent Supreme Court Ruling (2020)
ICAI Guidance Note (under development) on accounting of cryptocurrencies
Income Tax Act, 1961 – post Budget 2022, 30% tax and 1% TDS on transfer of virtual digital assets
Schedule III (Amendment) – Companies now required to disclose crypto asset holdings from FY 2021–22
Case Laws
1. Internet and Mobile Association of India v. R.B.I. (2020) 10 SCC 274
The SC quashed the circular issued by RBI in 2018 that prohibited the provision of banking services by any crypto-related businesses keeping in mind that it was against Article 19(1) (g).
Significance: Established that dealing in cryptocurrencies is not per se illegal in India, enabling corporates to hold such assets, albeit with caution.
2. SEC v. Ripple Labs Inc. (USA, ongoing)
The SEC alleges that Ripple’s XRP tokens are securities and were sold without proper registration.
Implication: If XRP is deemed a security, corporations holding or transacting in such tokens may be subject to securities law disclosures and penalties.
3. Tulip Trading Ltd. v. Bitcoin Association for BSV (UK, 2022)
Raised issues of fiduciary duties of software developers in the event of asset loss due to hacks.
Possible analogy in corporate directors: Obligation to keep crypto assets in the name of the corporation.
Conclusion:
The Way Forward
Crypto assets have undeniably emerged as a financial frontier, and corporates will continue to explore their potential—whether as a hedge against inflation, a diversification tool, or a value proposition for tech-savvy investors. However, legal and accounting frameworks are lagging behind this innovation curve.
A multipronged approach is required:
Statutory Clarity: India must define crypto assets uniformly across tax, securities, and corporate laws.
Accounting Standards Update: ICAI and international bodies like IASB should develop dedicated standards for digital assets.
Risk Governance: Corporates must establish internal controls and board oversight mechanisms before crypto inclusion.
Audit Frameworks: Guidelines for external auditors must evolve to verify crypto ownership and value with technological precision.
Without legal certainty and uniformity, crypto assets will continue to be both an opportunity and a liability on corporate balance sheets.
FAQS
Q1. Is it legal for Indian companies to hold crypto assets?
Yes, there is no statutory ban post the Supreme Court’s 2020 ruling. However, they must comply with disclosure and tax requirements.
Q2. How should crypto assets be reflected in corporate books?
Currently, as per global practice, they are shown as intangible assets under IAS 38/Ind AS 38, although this may not fully reflect fair value changes.
Q3. What are the tax implications of holding crypto in India?
Income from transfer of crypto is taxed at 30% under Section 115BBH, with 1% TDS under Section 194S of the Income Tax Act, 1961.
Q4. Can directors be held liable for losses in crypto investments?
Yes, if it’s proven that the investment was made without proper due diligence, violating their fiduciary duties.
Q5. What disclosures are Indian companies required to make?
Under the amended Schedule III to the Companies Act, 2013, companies must disclose crypto asset holdings, profits/losses, and deposits/advances related to trading or investing in crypto.
Q6. Are crypto holdings considered “cash or cash equivalents”?
No. Due to their volatility and lack of legal tender status, crypto assets cannot be classified as cash equivalents under accounting standards.
Q7. What due diligence should corporates conduct before acquiring crypto assets?
They should evaluate regulatory compliance, custodial arrangements, volatility risks, tax obligations, and governance mechanisms.
Q8. Are stablecoins treated differently than volatile crypto like Bitcoin?
While stablecoins aim for price stability, they are still considered crypto assets and are subject to the same regulatory and accounting challenges.
Q9. How do auditors verify crypto asset ownership?
Auditors may use blockchain analytics tools, request wallet addresses, and confirm private key controls, though there are no uniform protocols yet.
Q10. Could future legislation ban crypto holdings by companies?
Possibly. The Indian government has proposed bills in the past to regulate or restrict crypto. Hence, legal compliance should be dynamic and vigilant.
Certainly! Here are 10 additional FAQs to supplement your article, enhancing its practical utility for readers interested in the legal and accounting aspects of crypto assets on corporate balance sheets:
Q11. Can crypto assets be used by companies as collateral for loans?
Yes, in some jurisdictions, crypto can be pledged as collateral, provided the lender accepts it and regulatory norms permit. In India, traditional banks are cautious due to lack of RBI clarity. Legal enforceability of such collateral remains untested in Indian courts.
Q12. What are the risks of holding crypto assets through third-party custodians?
Third-party custody introduces counterparty risk, theft or hacking exposure, and jurisdictional legal uncertainties. Companies must conduct proper due diligence and have contractual protections in place.
Q13. Is it mandatory to get board approval before investing in crypto assets?
Yes, under corporate governance norms and the Companies Act, 2013, significant financial decisions—especially involving risky assets—should be approved by the Board and recorded in meeting minutes.
Q14. Are there sector-specific restrictions on crypto investments by companies?
Some regulated entities like NBFCs, insurance companies, or companies dealing with public funds may have sector-specific limitations or reporting obligations before engaging in crypto activities.
Q15. How do crypto losses affect the Profit & Loss statement of a company?
If crypto is classified as an intangible asset, impairment losses must be recorded when market value falls below book value. However, subsequent recoveries in value cannot be reversed, which creates a conservative accounting bias.
Q16. Are companies required to report crypto assets to tax authorities in India?
Yes. Under the Income Tax Act, gains from crypto transfers are taxable, and reporting is mandatory in income tax returns. Additionally, crypto trades above specified thresholds attract TDS under Section 194S.
Q17. Can employee salaries be paid in crypto assets?
While technically possible, it is legally and fiscally problematic in India due to volatility, income tax withholding requirements, and lack of legal tender status. It’s also impractical under current Indian labour and tax laws.
Q18. Can a company raise funds through an Initial Coin Offering (ICO)?
Indian law currently does not regulate ICOs, and such activities are fraught with legal risk. In other jurisdictions, ICOs may be classified as securities offerings and subject to regulatory approvals.
Q19. What are the penalties for non-disclosure of crypto holdings in financial statements?
Failure to disclose crypto holdings may result in penalties under the Companies Act, 2013, for inaccurate or incomplete financial statements. Directors and CFOs may be held liable for wilful omission.
Q20. What happens if a company loses access to its crypto wallet or private keys?
Legally, this could result in a complete write-off of the asset. Directors may face scrutiny for negligent asset management, especially if no risk mitigation (like key backups or custodial services) was in place.
