Blockchain technology and virtual assets have become intertwined concepts with various underpinning themes describing their association. Digital assets and virtual currency are some of the notable applications of blockchain. However, how could common users leverage the benefits of digital assets and virtual currency on blockchain? This is where you would come across a Virtual Asset Service Provider.
With the recent regulatory interventions for Virtual Asset Service Providers or VASPs by the Financial Action Task Force (FATF), many people are eager to know about the term. The guidance regarding virtual assets and virtual asset service providers by FATF with a risk-based approach offers an accurate representation of VASPs. The following discussion covers some of the important terms related to virtual asset service providers while reflecting on regulatory implications associated with VASPs.
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Origins of VASPs
The first thing that comes to the mind of any beginner learning about VASPs points to their origins. The FATF or the Financial Action Task Force introduced the concept of a Virtual Asset Service Provider to the world for the first time. FATF released a report titled “Guidance for a Risk-based Approach to Virtual Assets and Virtual Asset Service Providers” in June 2019. The guidance outlined various conditions focused on resolving various uncertainties and doubts of businesses regarding digital assets and virtual currencies. So, what exactly is the FATF?
The FATF is undoubtedly one of the most discussed terms when it comes to VASP or virtual asset service providers. Anti-Money Laundering or AML enthusiasts might be aware of FATF and its functions. However, a major share of the world’s population is unaware of the identity and work of FATF.
The Financial Action Task Force or FATF is actually an inter-governmental body created in 1989 by member regions. The role of FATF primarily focuses on issuing guidance to countries regarding measures for anti-money laundering (AML) and fighting against financing for terrorism.
Countries involved as members of FATF undergo evaluation on the grounds of compliance with FATF recommendations, referred to as mutual evaluations. It is also important to note that member countries have to face considerable pressure to achieve good results in mutual evaluations.
The international group made of member countries can issue guidance to countries, although the guidance does not become laws of the country. Member countries can tailor their existing regulations and laws and adopt new frameworks with ease. Now, the FATF has issued guidance on definitions for virtual assets and a Virtual Asset Service Provider. Let us find out more about these terms to understand them better.
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Digital Asset Entity and Digital Asset Customer
Before diving into answers for ‘what is a virtual asset?’ and the definition of VASPs, it is important to understand some other significant terms. Digital Asset Entity (DAE) and Digital Asset Customer (DAC) are the two terms you must understand carefully before starting a discussion on virtual assets and VASPs.
Digital Asset Entity or DAE basically refers to the umbrella term for various businesses developed on virtual currency transactions. VASPs such as virtual currency exchanges and ATMs come under the category of Digital Asset Entities. They could be financial institutions or even other entities such as incubators or gambling sites that use virtual assets without being classified as financial institutions. Digital Asset Entity is also known as Virtual Asset Entity in certain cases.
The next important term you must know before diving into a discussion on VASP and its functionalities is Digital Asset Customer. DAC basically points out to any Digital Asset Entity using services of a formal financial institution such as a bank. DAC initially served a description of the broad classification of virtual currency-based customers in the enforcement action by the US Department of the Treasury OCC against MY Safra Bank, a US Bank, in the early half of 2020.
The Office of the Comptroller of the Currency (OCC) issued one of the first enforcement actions related to virtual currency against MY Safra Bank. The enforcement action invited a cease and desist order focused on inadequate anti-money laundering practices for monitoring and compliance of digital asset customers of the bank.
What is a Virtual Asset?
The definition of a virtual asset is one of the prominent highlights in the FATF guidance discussed earlier. Virtual assets are a new addition by FATF for governing the use of blockchain-based digital and virtual assets as well as a digital currency. The definition of a virtual asset points out that it is actually a digital representation of value, eligible for trading or transferring digitally.
In addition, it can also help in serving investment or payment activities. On the other hand, it is also important to know what a virtual asset is not. They do not feature any digital variants of fiat currencies, securities, or other financial assets covered already in other sections of the FATF Recommendations.
The broader scope of answers to ‘what is a virtual asset?’ gives the opportunity for including virtual currencies alongside other types of assets such as ICO (initial coin offering) tokens. In addition, it also emphasizes on the inclusion of commodity or fiat-backed digital currencies as well as utility tokens. At the same time, it is also essential to remember that virtual service tokens do not qualify as virtual assets.
On the contrary, virtual service tokens are actually a digital representation of value that is not eligible for transfer or exchanges with a third party at any time. Virtual service tokens also feature digital tokens targeted towards offering access to applications or services or facilities of services or functions directly to the owner.
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Virtual Asset Service Provider
The most important thing for which you have been waiting till now, i.e., the definition of a virtual asset service provider, is quite simple to understand. You can start by understanding the virtual asset service. A virtual asset service could point out the process of issuing a virtual asset. On the other hand, it could also refer to the business of executing one or multiple selected activities for another individual or on their behalf. The activities referred to in this case include,
- Exchange of virtual assets and fiat currencies
- Safeguarding or administration of virtual assets or instruments which can enable comprehensive control over virtual assets
- Exchanging convertible virtual assets from one to many other forms
- Transfer of virtual assets
- Participation in and facility of financial services associated with an issuer’s offer or a virtual asset sale
Therefore, any business which qualifies these criteria could become VASP or virtual asset service providers. In addition, you must also note that investment funds do not fall in the category of VASPs with certain conditions. Such a condition is evident in investment funds accepting redemptions or subscriptions in kind while using an external trading platform.
Significance of VASPs
The importance of a Virtual Asset Service Provider is also one of the crucial highlights you need to understand. The definition of VASPs focuses on capturing particular financial activities and functions. Interestingly, VASPs do not depend on any particular entity. On the contrary, virtual asset service providers are largely concerned about the approach an individual follows for using virtual assets. FATF itself has stated that any individual engaged with any activities outlined by FATF as a legal or naturalized business would qualify as VASP. The technology used by them for addressing virtual asset activities does not have any influence on qualification as VASPs.
The significance of the FATF recommendations for VASPs implies that some digital asset entities like miners could not become VASPs. A single miner could not have the necessary traits for classification as virtual asset providers. On the other hand, the activity of a mining pool in accordance with FATF guidance can qualify them as VASPs.
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Scope for Decentralized Exchanges as VASPs
With the discussions on virtual assets becoming prominent with respect to VASPs, it is important to wonder about decentralized exchanges. Can they serve as ideal virtual asset service provider examples? The good news is that decentralized exchanges or DEXs confidently satisfy the requirements for VASPs. DEXs or other decentralized apps (dApps) and their owner or operator can qualify as VASPs by fulfilling certain conditions. For example, they must ensure or carry out a value exchange or transfer in traditional fiat currency or virtual assets.
The Broader Picture
So, it is clearly evident that a Virtual Asset Service Provider, according to FATF, can help in improving AML practices. The complicated factor here refers to the interchangeability of terms such as virtual asset, virtual currency, and digital asset. Therefore, classifying an unhosted wallet among VASPs in an unauthorized manner could impose specific AML obligations.
It is obviously reasonable to wonder about the long-term picture with VASPs. Interestingly, the beginning of the Virtual Asset Service Providers Regime in Cayman paints a favorable picture for the future of VASPs. Learn more about virtual asset service providers and how they leverage the power of blockchain now!
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