As cryptocurrencies like Bitcoin became more mainstream, regulators and international bodies recognized the need to monitor and regulate these new financial activities.
What is VASP?
As cryptocurrencies like Bitcoin became more mainstream, regulators and international bodies recognized the need to monitor and regulate these new financial activities.
The Financial Action Task Force (FATF), an intergovernmental body that sets standards for combating money laundering and terrorist financing, played a significant role in formalizing the VASP terminology. In 2019, FATF provided detailed guidelines, urging its member countries to regulate VASPs, ensuring they adhere to the equivalent AML/CFT requirements as traditional financial institutions.
This move aimed to promote transparency, prevent illicit activities, and foster trust in the growing virtual asset sector.
But let’s look at VASPs and their meaning a bit closer. To understand VASPs, first, we need to comprehend the definition of Virtual Assets (VAs).
What is a virtual asset?
Based on the FATF definition, a virtual asset is a digital representation of value that can be digitally traded or transferred and used for payment or investment purposes.
The exact FATF definition comes as follows:
A virtual asset is a digital representation of value that can be digitally traded or transferred and can be used for payment or investment purposes. Virtual assets do not include digital representations of fiat currencies, securities, or other financial assets that are already covered elsewhere in the FATF Recommendations. (FATF. 2021b, p. 109)
This definition is deliberately broad to encompass a wide variety of digital assets.
What are examples of virtual assets?
The most common examples of virtual assets are virtual currencies such as Bitcoin, Ethereum, Solana, Tether, and Litecoin. However, if it comes to gaming tokens, NFTs, and other assets related to cryptocurrency, the FATF has many circumstances based on what will be considered virtual assets.
NB! The virtual asset landscape is continually evolving. New types of virtual assets and tokens are being developed regularly, and their classification may vary depending on their specific use cases and functionalities. Most recent and updated information can be found on the FATF web page.
Examples of Virtual Assets
- Cryptocurrencies: These are decentralized digital currencies that use cryptography for security. Examples include:
- Bitcoin (BTC): The first and most well-known cryptocurrency.
- Ethereum (ETH): Known for its smart contract functionality.
- Litecoin (LTC), Ripple (XRP), and Bitcoin Cash (BCH), among others.
- Stablecoins: These are digital assets linked to the value of a stable asset, such as a specific amount of a fiat currency like the US dollar. Examples include:
- Tether (USDT)
- USD Coin (USDC)
- Binance USD (BUSD)
- Utility Tokens: These tokens provide users with a product or service. They can be used on a specific platform or service. For example:
- Binance Coin (BNB): Created as a utility token for the Binance cryptocurrency exchange.
- Chainlink (LINK): A decentralized oracle network token.
- Security Tokens: These represent ownership in an underlying asset, such as a company or property, and may offer dividends, revenue shares, or other financial benefits.
- Platform Tokens: These are native tokens of blockchain platforms that can be used to create other tokens or run smart contracts. Examples include:
- Ethereum (ETH)
- EOS (EOS)
- Tron (TRX)
- DeFi Tokens: With the rise of decentralized finance (DeFi), many new tokens are created that represent assets or governance rights within a DeFi protocol. Examples include:
- UniSwap (UNI)
- Compound (COMP)
- Aave (AAVE)
- Central Bank Digital Currencies (CBDCs): While, still in development, in many countries, these are digital versions of a country’s national currency and would be considered virtual assets under FATF’s definition.
What are Virtual Asset Service Providers (VASPs)?
FATF defines VASPs as the following:
A Virtual asset service provider (VASP) means any natural or legal person who is not covered elsewhere under the Recommendations and as a business, conducts one or more of the following activities or operations for or on behalf of another natural or legal person:
- the exchange between virtual assets and fiat currencies;
- the exchange between one or more forms of virtual assets;
- transfer of virtual assets;
- safekeeping and/or administration of virtual assets or instruments enabling control over virtual assets; and
- participation in and provision of financial services related to an issuer’s offer and/or sale of a virtual asset. (FATF. 2021b, p. 109)
Therefore Virtual Asset Service Provider refers to any business or entity that conducts activities or operations related to certain types of virtual assets on behalf of its customers.
VASPs typically provide services such as exchange between virtual and fiat currencies, transfer of virtual assets, and safekeeping or administration of virtual assets or instruments enabling control over virtual assets, among others.
What are examples of Virtual Asset Service Providers?
Examples of Virtual Asset Service Providers (VASPs):
- Cryptocurrency Exchanges: Platforms like Coinbase, Binance, and Kraken allow users to buy, sell, and trade virtual assets against fiat currencies or other cryptocurrencies.
- Wallet Providers: Companies such as Ledger, Trezor, and MyEtherWallet provide digital wallets where users can securely store, manage, and transfer virtual assets.
- Peer-to-Peer Platforms: LocalBitcoins and Paxful are examples of peer-to-peer platforms where individuals can buy and sell virtual assets directly with each other, often with the environment providing an escrow service for safety.
- Custodial Services: BitGo and Gemini Custody specialize in providing secure storage solutions for several virtual assets, typically targeting institutional investors.
- ATM Operators: Bitcoin ATMs, run by various companies, allow individuals to buy or sometimes sell cryptocurrencies in physical locations using cash or cards.
- Payment Service Providers: BitPay and CoinGate are platforms that facilitate merchants in accepting virtual asset payments for goods and services.
- Token Issuance Platforms: Some platforms, like Ethereum, allow for the creation and issuance of new tokens, often used for Initial Coin Offerings (ICOs) or decentralized finance (DeFi) purposes.
- DeFi Platforms: Environments like Uniswap, MakerDAO, and Compound offer various financial services using virtual assets, from trading to lending, without traditional intermediaries.
- Brokers: Entities or individuals that buy and sell virtual assets on behalf of customers, sometimes offering advice or portfolio management.
Dependent upon context:
- The central developer of the governance body behind a stablecoin (dependent upon stablecoin design)
- Creators, owners, and operators who maintain control or sufficient influence over DeFi protocol arrangements
- NFTs (when used for payment or investment purposes)
- Decentralized exchanges
The novelty of decentralization, paired with the fast-paced evolution of the crypto space, has created ample opportunities for gray areas to inform the interpretation of these definitions.
Are NFTs, Stablecoin providers, and decentralized finance protocols VASPs?
The classification of NFT platforms, Stablecoin providers, and decentralized finance (DeFi) protocols as Virtual Asset Service Providers can be complex, and it usually depends on how they operate and the regulatory framework they fall under.
NFTs:
Non-fungible tokens (NFTs) platforms could be VASPs if they facilitate the buying, selling, or transferring of NFTs, which are virtual assets according to the FATF definition.
It means if the NFT has the potential to be used for payment or investment, the platform may fall under VASP regulation.
Stablecoin Providers:
Stablecoin providers are more likely to be considered VASPs. They often facilitate the transfer, storage, and issuance of stablecoins, which are broadly accepted to be a type of virtual asset. If these providers offer wallet services, exchange services, or transfer services for stablecoins, they would typically fall under the regulatory purview that applies to VASPs.
Decentralized Finance (DeFi):
DeFi protocols present a unique challenge when it comes to classification as a VASP. By nature, they are decentralized and may not have a single entity responsible for their operations. However, if a centralized team governs the protocol, or if there’s a centralized point through which users must pass to interact with the protocol, there’s a possibility that the DeFi protocol could be classified as a VASP.
The FATF and its influence
The Financial Action Task Force is an intergovernmental body established to combat money laundering and terrorist financing. With the rise of virtual assets, the FATF recognized the potential for misuse. Hence, in 2019, the FATF provided guidelines urging member countries to regulate VASPs, ensuring they met the equivalent AML/CFT requirements as traditional financial institutions.
Under FATF’s guidance:
- VASPs must conduct thorough KYC checks.
- There should be mandatory reporting of suspicious transactions.
- VASPs should maintain detailed records of their users and transactions.
These guidelines by the FATF have played a pivotal role in shaping national regulations around VASPs and ensuring that the virtual asset sector operates transparently and legitimately.
The Future of VASPs
With increasing institutional interest, technological advancements, and a global move towards a more digital economy, VASPs are heading for significant growth. They will likely play an even more crucial role in integrating VAs into mainstream financial systems, driving innovation, ensuring compliance, and fostering trust within the virtual asset industry.
Conclusion
In conclusion, VASPs are more than just a financial trend. They’re the cornerstone of a new digital era in finance. They have integrated traditional financial mechanisms with revolutionary digital assets in a way that’s rapidly shaping our economic landscape. As these virtual service providers continue to advance, it becomes crucial for anyone involved in this dynamic sphere to fully grasp their functions, history, and ever-changing regulatory nuances.
Given the rapid pace at which this field and its corresponding regulations evolve, expert guidance is not just a luxury—it’s a necessity. That’s where Vaspex Legal comes in. We specialize in navigating the complexities of the VASP regulatory environment, offering you the crucial insights and expert advice you need to operate successfully in this transformative space.
If you need tailored advice in the ever-shifting world of virtual assets and VASP license obtaining, don’t hesitate. Book a consultation with Vaspex Legal today and secure your position in the future of finance.
References: FATF. 2021b | Updated Guidance for a Risk-based Approach to Virtual Assets and Virtual Asset Service Providers.