When a financial firm collapses, the first question customers ask is whether their holdings are protected from the firm’s creditors or swept into the general pool of assets available to repay them. Pakistan’s Virtual Assets Act, 2026 answers that question directly, and in unusually strong terms.
This analysis reads section 24(2) of the Virtual Assets Act, 2026 as passed by the National Assembly, alongside the surrounding provisions of section 24, and sets out what the insolvency protection actually does and what it depends on.
What does section 24(2) say about Customer Assets in a VASP’s insolvency?
Section 24(2) removes Customer Assets from a Licensee’s insolvency estate entirely, and does so with language designed to override conflicting law. The Act states:
“Notwithstanding anything to the contrary contained in any other law for the time being in force, Customer Assets held by a Licensee shall not form part of the Licensee’s estate in the event of its insolvency or liquidation.”
The opening phrase — “notwithstanding anything to the contrary contained in any other law for the time being in force” — is a non-obstante clause, a common drafting device in Pakistani legislation used to signal that this provision prevails over any conflicting provision in another statute. Its inclusion here means Parliament anticipated that Pakistan’s general insolvency and company law might otherwise treat customer holdings as part of a failed company’s pool of assets available to creditors, and deliberately overrode that default outcome for virtual asset customers specifically.
Why does the ring-fence matter in practical terms?
In an ordinary corporate insolvency, a liquidator gathers the company’s assets into a single estate and distributes them among creditors according to a statutory priority order — secured creditors first, then various classes of unsecured and preferential creditors, with ordinary customers typically standing far back in that queue. Section 24(2) takes Customer Assets out of that process altogether. Because Customer Assets under section 3(1)(vii) already exclude assets owned by the VASP itself, the ring-fence in 24(2) is not diverting company assets away from creditors — it is confirming that assets which were never the company’s property in the first place cannot be treated as though they were, purely because the company happened to be holding them at the moment of failure.
Our reading is that this distinction — between assets the firm owns and assets the firm merely holds — is the conceptual foundation the entire protection rests on. A liquidator distributing a failed VASP’s estate should, on the wording of section 24(2), treat customer virtual assets and customer fiat balances as never having entered the estate at all, rather than as estate assets subject to a customer priority claim within it.
Does the ring-fence work automatically, or does it depend on something else?
This is the point at which section 24(2) cannot be read in isolation from section 24(1). The insolvency protection presumes that Customer Assets were, in fact, held in segregated accounts separate from the Licensee’s own assets throughout the relevant period, as section 24(1) requires. The Act states the segregation duty as a standing, continuous obligation:
“A Licensee shall, at all times, hold Customer Assets in segregated accounts separate from its own assets, in the manner prescribed by Regulations.”
If a Licensee failed to maintain that separation — for example, by commingling customer funds with its own operating capital, in breach of section 24(1) — the practical question a liquidator and the courts would then face is evidentiary: can the specific assets belonging to customers still be identified and traced separately from the firm’s own assets at the point of failure? Section 24(2) does not itself address what happens where segregation was not properly maintained, and this analysis does not speculate about tracing doctrine or equitable remedies beyond what the Act states, since that sits outside the three source documents reviewed. What can be said plainly is that the statutory ring-fence is strongest exactly where the underlying segregation duty was honoured in practice, and weakest exactly where it was not.
How does this interact with the fiduciary duty and anti-encumbrance rules in the same section?
Section 24(3) and 24(4) reinforce the ring-fence from a different angle — by restricting what a Licensee can do with Customer Assets while it is still solvent, so that fewer disputes about ownership arise if it later fails. The table below sets out how the four subsections of section 24 work together.
| Subsection | Function |
|---|---|
| 24(1) | Requires structural segregation — the operational precondition the ring-fence depends on |
| 24(2) | Removes segregated Customer Assets from the insolvency estate |
| 24(3) | Imposes a fiduciary duty of honesty, fairness and acting in customers’ best interests |
| 24(4) | Prohibits rehypothecation, lending, pledging or encumbrance without explicit, informed, revocable written consent |
Subsection (4) is particularly relevant to the insolvency question. If a Licensee pledged customer virtual assets as collateral for its own borrowing — something 24(4) prohibits without the customer’s specific consent — those assets could become entangled in a secured creditor’s claim precisely because the firm’s own conduct created a competing interest in them. The prohibition on encumbrance in 24(4) is, in that sense, a second layer of protection for the same outcome section 24(2) is trying to secure: keeping customer holdings genuinely free of claims that belong to the firm’s own creditors.
What role does the annual audit play in testing whether the ring-fence will actually hold?
Section 27(2) of the Act requires a Licensee’s annual audit, conducted by a firm of Chartered Accountants approved by the Division concerned, to include “a verification of the segregation of Customer Assets as required under section 24.” This is the mechanism by which PVARA and the market gain independent assurance, before any insolvency event occurs, that the precondition section 24(2) depends on is actually being met. A Licensee that passes this audit annually builds a documented record supporting the ring-fence; a Licensee that has never been tested, or that has qualified audit findings on segregation, presents a materially weaker position if insolvency were ever to occur.
Two practical points follow from reading section 24(2) alongside its surrounding subsections:
- The insolvency protection in 24(2) is only as strong as the segregation practice in 24(1) that underlies it — customers and counterparties assessing a VASP’s resilience should look at how segregation is actually implemented, not only at the existence of the statutory protection.
- The non-obstante clause in 24(2) is a strong drafting signal, but the Act does not itself resolve every practical insolvency-law question (such as tracing where funds were improperly commingled) — those questions would fall to be worked out under Pakistan’s general insolvency framework and the courts, outside what this Act states.
Related reading
- PVARA Exchange License: Capital, Rules & Obligations 2026
- PVARA Transfer & Settlement License: Crypto Payments 2026
- PVARA Licensing Process: NOC to Full Licence, Step by Step
- The PVARA Licensing Gold Rush: Pakistan’s Crypto Frontier
- PVARA Custody License: Safeguard Customer Crypto 2026
- goAML Registration for VASPs: Who Registers, and When
About this analysis
This analysis was prepared by the CoinConnect research desk from sections 3(1)(vii), 24 and 27 of the Virtual Assets Act, 2026 as passed by the National Assembly, read as published. The Act does not address, and this analysis does not speculate about, what happens to the insolvency ring-fence where a Licensee failed to maintain the segregation required by section 24(1) — that is a gap in the source material, not a settled position stated in the text. Where practice is not yet settled or guidance has not been issued, that is stated in the text above.
Regulatory positions change and specific requirements should be verified against the current position published by the relevant authority before you act on them. This is information and analysis, not legal advice, and it does not create an advisory relationship. Take professional advice on your own circumstances.
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