Companies that are considered Virtual Asset Service Providers are subject to all of the regulatory scrutiny that traditional financial institutions are subject to, and then some. But what exactly is a VASP anyway?
This enhanced scrutiny could result in strong penalties, including but not limited to fines and restrictions. To avoid this, proper efforts must be made to remain compliant with Financial Action Task Force (FATF) guidelines. In order for a company or person to implement proper compliance controls, there must first be an understanding that they fall under the umbrella of what can be considered a Virtual Asset Service Provider as defined by the FATF.
What is a Virtual Asset (VA)?
Any digital representation of value (which is blockchain native) including:
- Standard cryptocurrency
- Utility Tokens
But not including:
- Central bank issued digital currency
What is a Virtual Asset Service Provider (VASP)?
According to the expanded FATF guidelines, a VASP is any individual or business which facilitates the exchange, transfer, custody, or issuer’s offer/sale of a virtual asset, including any one of the following:
- Centralized Exchange
- Decentralized Exchange
- Wallet Providers or Platforms
- Escrow services including, but not limited to:
- Smart contract powered services
- Brokerage services
- Order-book exchange services
- Advanced trading services
- Custody providers
- Mining pools
- Investment vehicles
In 2018, on the heels of the cryptocurrency market’s unprecedented boom and bust, the FATF updated its requirements to incorporate two new phrases and definitions: Virtual Asset(s) (VAs), and Virtual Asset Service Provider(s) (VASPs). The update explicitly clarifies that all old and new FATF requirements apply to activities involving VAs and VASPs.
The 2018 update has had some serious and lasting implications for the crypto space, “legacy” financial services, and new related technologies. The FATF has been updating its guidelines for the cryptocurrency space over the past decade, but clarifying and incorporating this new terminology provides a strong reference for how countries should properly set up regulations with regard to cryptocurrency.
The FATF is a powerful Non-Government Organization tasked with helping the international financial system eliminate criminal activity with respect to Anti Money Laundering (AML) and Combating the Financing of Terrorism (CFT).
Its guidelines become requirements, which then become policy to be further refined and administered by FATF member countries. Over time, standards emerge as members work together to align interests and reduce friction between one another. When the FATF updates requirements, expect those requirements to become federal law.
The policies usually surface in the form of Know-Your-Customer (KYC) requirements which dictate the amount of information that must be shared by and between individuals and businesses in order to legally transact with one another. This KYC information serves as an important tool for law enforcement to carry out its duties in investigating financial crime, specifically money laundering and terrorism financing.
VAs and VASPs
In other words, VAs and VASPs must comply with FATF guidelines. Subsequently, it is vital to understand what constitutes a VA or VASP in order for entities to both regulate, and comply with regulation. The 2018 recommendations left us with the following criteria for defining VAs and VASPs:
- Are digital representations of value that can be digitally traded or transferred.
- Can be used for payment or investment purposes.
- Do not include digital representation of fiat currency.
- Do not include digital representation of securities.
Virtual Asset Service Providers:
- Can be legal or natural persons or business entities, and as a business conducts one or more of the following activities on behalf of another natural or legal person or business:
- Exchange between VAs and fiat currencies.
- Exchange between one or multiple forms of VAs.
- Facilitate transfers of VAs.
- Safekeeping and/or administration of VAs or instruments enabling control over VAs.
- Participation in and provision of financial services related to an issuer’s offer and/or sale of a virtual asset.
This is a standard criteria for measuring whether or not an individual or entity falls under the scope of what should be regulated in the blockchain space as recommended by the FATF.
However, In March of 2021, the FATF expanded its guidelines.
Notably, this expansion further clarified the definition of VAs and VASPs. This is in concurrence with the rise in adoption of various blockchain technologies over 2020, and the years prior.
In particular, FATF clarifies the following:
- Most (non-fungible tokens) NFTs should be considered VAs.
- Stablecoins should be considered VAs.
- Central bank issued digital currencies should not be considered VAs.
- Decentralized Exchanges should be considered VASPs.
- Decentralized platforms or DApps are considered VASPs (so far that the relevant smart-contract developers are considered VASPs for having written code that executes operations which fall under the definition of a VASP as laid out in 2018)
- VA escrow services are all VASPs.
- Any platform facilitating P2P transactions between individuals is a VASP.
The recommendations are due to ratify in June of 2021. These clarifications widen the umbrella of what types of activity should and will be regulated by federal governments as the crypto space matures. Expect the definitions to continue expanding over time as any uncategorized technologies gain in adoption, and any brand new technologies emerge. All VASPs are required to use tools that improve the AML-CFT controls and ability to monitor counterparty risk. The faster companies adopt dynamic tools to ensure compliance, the more likely they are to remain compliant and avoid tough penalties.