What Is a VASP (Virtual Asset Service Provider)?

Virtual Asset Service Providers (VASPs) are prominent in the digital asset ecosystem. They act as intermediaries for various digital asset activities in cryptocurrencies and blockchain technology. This article clarifies the concept of VASPs and their operational framework.

Understanding a VASP

A Virtual Asset Service Provider (VASP) is any natural or legal person conducting specific activities involving virtual assets for another. The Financial Action Task Force (FATF), an intergovernmental body combating money laundering and terrorist financing, introduced “virtual asset” and “virtual asset service provider” into its glossary in October 2018. The FATF defines a virtual asset as a digital representation of value that can be traded or transferred for payment or investment. This definition generally excludes digital representations of fiat currencies, securities, and other financial assets already covered by existing financial regulations.

An entity qualifies as a VASP by performing financial activities with virtual assets for customers, regardless of the technology employed. This includes facilitating transactions, managing digital assets, or providing related financial services. The FATF’s definition emphasizes function over form, meaning an entity is a VASP based on services provided, not its self-description. Countries are urged to apply a risk-based approach to virtual asset activities and VASPs, requiring them to be licensed or registered and subject to effective supervision.

Services Provided by VASPs

VASPs offer a range of services central to the virtual asset economy. A primary service is the exchange between virtual assets and fiat currencies, allowing users to buy or sell cryptocurrencies with traditional money. Cryptocurrency exchange platforms facilitate this conversion, enabling market entry or exit.

Another key service is the exchange between virtual assets, where users trade one cryptocurrency for another, like Bitcoin for Ethereum. This function is commonly seen on digital asset trading platforms. VASPs also provide the transfer of virtual assets, moving them between wallets for a customer.

Custody and administration of virtual assets or instruments enabling control over virtual assets represent another significant service. This includes wallet providers securely storing cryptocurrencies for clients, managing private keys and offering advanced security. Lastly, VASPs provide financial services related to an issuer’s offer or sale of a virtual asset, such as assisting with initial coin offerings (ICOs) or token sales.

Global Regulatory Landscape

Regulation of Virtual Asset Service Providers is primarily shaped by the Financial Action Task Force (FATF). The FATF sets global standards for anti-money laundering (AML) and countering the financing of terrorism (CFT), extending them to virtual assets and VASPs. This aims to prevent the misuse of virtual assets for illicit activities, as their pseudonymous nature can attract unlawful purposes.

FATF Recommendation 15 mandates VASPs adhere to AML/CFT rules, similar to traditional financial institutions. This includes requirements for risk assessment and mitigation specific to virtual asset operations. While not legally binding, FATF recommendations serve as global guidelines for national jurisdictions to implement into their own laws. Countries failing to implement these standards risk FATF review or other measures.

This framework ensures countries establish regulatory and supervisory responses to virtual asset activities. It encourages jurisdictions to identify, assess, and understand associated risks. The FATF also emphasizes international cooperation among VASP supervisors due to the cross-border nature of virtual asset activities.

Core Regulatory Requirements

Virtual Asset Service Providers face core regulatory obligations to prevent illicit financial activities. Know Your Customer (KYC) is a fundamental requirement, obliging VASPs to identify and verify customer identity. This involves collecting and authenticating customer information, like government-issued identification, to ensure legitimate users. KYC procedures also help assess customer risk levels for due diligence.

Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT) obligations require VASPs to implement internal controls and monitor transactions for suspicious activities. This involves analyzing transaction patterns and reporting unusual transactions to authorities. VASPs are also mandated to maintain detailed records of transactions and customer due diligence information for at least five years.

The “Travel Rule,” FATF Recommendation 16, requires VASPs to share originator and beneficiary information for virtual asset transfers exceeding a specified threshold. This rule increases transparency and traceability in virtual asset transactions, aligning them with traditional wire transfer standards. While FATF recommends a $1,000 or €1,000 threshold, this amount varies by jurisdiction.