What is a Virtual Asset Service Provider (VASP)?
A VASP, as defined by the Financial Action Task Force (FATF), is any legal entity that conducts one or more of the following activities as a business:
- Exchange between virtual assets and fiat currencies
- Exchange between different virtual assets
- Transfer of virtual assets
- Safekeeping and/or administration of virtual assets or instruments enabling control over virtual assets
- Participation in and provision of financial services related to an issuer’s offer and/or sale of a virtual asset
Most countries adhere to the Financial Action Task Force’s (FATF) definition. These services are critical for the crypto market, enabling users to buy, sell, store, and manage their digital assets securely and efficiently. VASPs encompass a variety of businesses, including crypto exchanges, wallet providers, and custodial services.
Why Should VASPs Be Regulated?
The decentralised and often anonymous nature of crypto-assets makes it crucial to regulate VASPs for several key reasons:
- Preventing Illicit Activities: Regulation is essential to fight money laundering, terrorist financing, and other illegal activities by enforcing Know Your Customer (KYC) and Anti-Money Laundering (AML) protocols.
- Ensuring Market Integrity: Regulatory oversight ensures that VASPs operate transparently and fairly, fostering trust and stability within the market.
- Protecting Consumers: Regulations safeguard consumers from fraud by ensuring that VASPs adhere to high standards of security and operational integrity.
What Are the Requirements for Becoming a VASP?
Becoming a VASP requires several key steps to ensure compliance with regulatory standards and to offer secure, reliable services to clients. The main steps include:
- Establish a Legal Entity: Set up a legal entity by choosing an appropriate business structure, registering with relevant authorities, and completing all legal formalities.
- Obtain a Licence: All jurisdictions require VASPs to obtain a specific licence to operate. The licensing process typically involves submitting detailed information about the business model, financial health, and security measures.
- Satisfy Financial Requirements: VASPs are required to meet specific financial criteria, including maintaining a minimum capital reserve to cover operational risks and safeguard client funds.
- Fit and Proper Requirements: Regulatory authorities typically require VASPs to satisfy “fit and proper” criteria, which involve conducting background checks on the company’s directors and senior management to ensure they possess the necessary integrity, competence, and financial soundness.
- Implement AML and CTF Measures: VASPs are required to implement comprehensive AML and counter-terrorism financing (CTF) measures. These include conducting thorough customer due diligence (CDD), monitoring transactions, and reporting any suspicious activities.
- Establish Strong Security Protocols: To protect users against cyber threats, Virtual Asset Service Providers (VASPs) must adopt advanced security measures, such as multi-factor authentication, encryption, and routine security audits.
What Types of Services Do VASPs Usually Provide?
VASPs provide a range of services tailored to the diverse needs of virtual asset users, including
Exchange Services
Facilitating the purchase and sale of virtual assets for fiat currencies or other virtual assets. This includes providing a trading platform where users can exchange various types of virtual assets and ensuring adequate liquidity for these transactions.
Transfer Services
Overseeing the transfer of virtual assets between wallets or accounts. This involves processing blockchain transactions and ensuring transfers are completed accurately and securely.
Custodial Services
Offering secure storage solutions for virtual assets, often with advanced security features such as multi-signature wallets and cold storage. Custodians protect users’ assets from theft and loss.
Provision of Financial Services Related to an Issuer’s Offer and/or Sale of a Virtual Asset
This encompasses several crucial activities for managing and investing in virtual assets, including
- Portfolio Management and Investment Advice: VASPs provide portfolio management services and investment advice to clients, guiding decisions on purchasing, holding, and selling virtual assets to optimise returns.
- Dealing with Crypto-Assets as a Principal or Agent: VASPs may act as principals, buying and selling assets for their own accounts, or as agents, facilitating transactions on behalf of clients.
- Placing, Reception, and Transmission: This includes assisting in the placement of virtual assets, receiving client orders, and transmitting these orders to the market for execution.
How Are VASPs Regulated?
The regulation of Virtual Asset Service Providers (VASPs) is essential for maintaining the integrity of the financial system and safeguarding consumers. Regulatory approaches vary by country:
Regulation through AML Laws
Most jurisdictions regulate VASPs by applying Anti-Money Laundering (AML) laws. For example, Estonia has enacted stringent AML regulations for VASPs, mandating comprehensive customer due diligence, transaction monitoring, and the reporting of suspicious activities. These measures aim to prevent money laundering, terrorist financing, and other illicit activities by ensuring that VASPs thoroughly know their customers and can track and report unusual behaviour.
Regulation through VASP-Specific Laws
Certain jurisdictions have established specific regulations tailored to the operations of VASPs. The British Virgin Islands (BVI) exemplifies this approach, having introduced legislation specifically to govern VASP activities and compliance. These specialised laws address the unique aspects of virtual asset services and provide a clear regulatory framework, ensuring that VASPs adhere to rigorous standards for security, transparency, and consumer protection.
Regulation through Financial Laws
In some countries, VASP activities are governed by existing financial legislation. In the United Kingdom, for instance, VASPs are regulated under the framework of financial services legislation, aligning them with the standards applied to traditional financial institutions. This includes requirements for financial stability, operational security, and consumer protection, thereby integrating VASP regulation with broader financial sector standards.
Challenges
If you are considering establishing a Virtual Asset Service Provider (VASP), you should take into account the following factors:
- Licence Cost: The expense of securing a licence to operate as a VASP can range widely, from USD 5,000 to USD 70,000. This can pose a significant barrier for smaller startups entering the market.
- Minimum Capital Requirements: VASPs are generally required to maintain a minimum capital reserve to address operational risks and safeguard client funds. These requirements can vary considerably, from USD 150,000 to USD 950,000, depending on the jurisdiction.
- Time to Obtain a Licence: Although some countries indicate that a licence can be obtained in 2-3 months, it typically takes around 6 months in practice due to the complex application process and the need to fulfil various regulatory requirements.
- Difficulty in Opening Bank Accounts: VASPs often encounter difficulties in opening bank accounts due to the perceived risks associated with virtual assets. The Astana International Financial Centre (AIFC) in Kazakhstan has pioneered guidance on the requirements for opening a bank account for a VASP, setting a benchmark for other jurisdictions to follow.
What is a Virtual Asset Service Provider (VASP)?
A VASP, as defined by the Financial Action Task Force (FATF), is any legal entity that conducts one or more of the following activities as a business:
- Exchange between virtual assets and fiat currencies
- Exchange between different virtual assets
- Transfer of virtual assets
- Safekeeping and/or administration of virtual assets or instruments enabling control over virtual assets
- Participation in and provision of financial services related to an issuer’s offer and/or sale of a virtual asset
Most countries adhere to the Financial Action Task Force’s (FATF) definition. These services are critical for the crypto market, enabling users to buy, sell, store, and manage their digital assets securely and efficiently. VASPs encompass a variety of businesses, including crypto exchanges, wallet providers, and custodial services.
Why Should VASPs Be Regulated?
The decentralised and often anonymous nature of crypto-assets makes it crucial to regulate VASPs for several key reasons:
- Preventing Illicit Activities: Regulation is essential to fight money laundering, terrorist financing, and other illegal activities by enforcing Know Your Customer (KYC) and Anti-Money Laundering (AML) protocols.
- Ensuring Market Integrity: Regulatory oversight ensures that VASPs operate transparently and fairly, fostering trust and stability within the market.
- Protecting Consumers: Regulations safeguard consumers from fraud by ensuring that VASPs adhere to high standards of security and operational integrity.
What Are the Requirements for Becoming a VASP?
Becoming a VASP requires several key steps to ensure compliance with regulatory standards and to offer secure, reliable services to clients. The main steps include:
- Establish a Legal Entity: Set up a legal entity by choosing an appropriate business structure, registering with relevant authorities, and completing all legal formalities.
- Obtain a Licence: All jurisdictions require VASPs to obtain a specific licence to operate. The licensing process typically involves submitting detailed information about the business model, financial health, and security measures.
- Satisfy Financial Requirements: VASPs are required to meet specific financial criteria, including maintaining a minimum capital reserve to cover operational risks and safeguard client funds.
- Fit and Proper Requirements: Regulatory authorities typically require VASPs to satisfy “fit and proper” criteria, which involve conducting background checks on the company’s directors and senior management to ensure they possess the necessary integrity, competence, and financial soundness.
- Implement AML and CTF Measures: VASPs are required to implement comprehensive AML and counter-terrorism financing (CTF) measures. These include conducting thorough customer due diligence (CDD), monitoring transactions, and reporting any suspicious activities.
- Establish Strong Security Protocols: To protect users against cyber threats, Virtual Asset Service Providers (VASPs) must adopt advanced security measures, such as multi-factor authentication, encryption, and routine security audits.
What Types of Services Do VASPs Usually Provide?
VASPs provide a range of services tailored to the diverse needs of virtual asset users, including
Exchange Services
Facilitating the purchase and sale of virtual assets for fiat currencies or other virtual assets. This includes providing a trading platform where users can exchange various types of virtual assets and ensuring adequate liquidity for these transactions.
Transfer Services
Overseeing the transfer of virtual assets between wallets or accounts. This involves processing blockchain transactions and ensuring transfers are completed accurately and securely.
Custodial Services
Offering secure storage solutions for virtual assets, often with advanced security features such as multi-signature wallets and cold storage. Custodians protect users’ assets from theft and loss.
Provision of Financial Services Related to an Issuer’s Offer and/or Sale of a Virtual Asset
This encompasses several crucial activities for managing and investing in virtual assets, including
- Portfolio Management and Investment Advice: VASPs provide portfolio management services and investment advice to clients, guiding decisions on purchasing, holding, and selling virtual assets to optimise returns.
- Dealing with Crypto-Assets as a Principal or Agent: VASPs may act as principals, buying and selling assets for their own accounts, or as agents, facilitating transactions on behalf of clients.
- Placing, Reception, and Transmission: This includes assisting in the placement of virtual assets, receiving client orders, and transmitting these orders to the market for execution.
How Are VASPs Regulated?
The regulation of Virtual Asset Service Providers (VASPs) is essential for maintaining the integrity of the financial system and safeguarding consumers. Regulatory approaches vary by country:
Regulation through AML Laws
Most jurisdictions regulate VASPs by applying Anti-Money Laundering (AML) laws. For example, Estonia has enacted stringent AML regulations for VASPs, mandating comprehensive customer due diligence, transaction monitoring, and the reporting of suspicious activities. These measures aim to prevent money laundering, terrorist financing, and other illicit activities by ensuring that VASPs thoroughly know their customers and can track and report unusual behaviour.
Regulation through VASP-Specific Laws
Certain jurisdictions have established specific regulations tailored to the operations of VASPs. The British Virgin Islands (BVI) exemplifies this approach, having introduced legislation specifically to govern VASP activities and compliance. These specialised laws address the unique aspects of virtual asset services and provide a clear regulatory framework, ensuring that VASPs adhere to rigorous standards for security, transparency, and consumer protection.
Regulation through Financial Laws
In some countries, VASP activities are governed by existing financial legislation. In the United Kingdom, for instance, VASPs are regulated under the framework of financial services legislation, aligning them with the standards applied to traditional financial institutions. This includes requirements for financial stability, operational security, and consumer protection, thereby integrating VASP regulation with broader financial sector standards.
Challenges
If you are considering establishing a Virtual Asset Service Provider (VASP), you should take into account the following factors:
- Licence Cost: The expense of securing a licence to operate as a VASP can range widely, from USD 5,000 to USD 70,000. This can pose a significant barrier for smaller startups entering the market.
- Minimum Capital Requirements: VASPs are generally required to maintain a minimum capital reserve to address operational risks and safeguard client funds. These requirements can vary considerably, from USD 150,000 to USD 950,000, depending on the jurisdiction.
- Time to Obtain a Licence: Although some countries indicate that a licence can be obtained in 2-3 months, it typically takes around 6 months in practice due to the complex application process and the need to fulfil various regulatory requirements.
- Difficulty in Opening Bank Accounts: VASPs often encounter difficulties in opening bank accounts due to the perceived risks associated with virtual assets. The Astana International Financial Centre (AIFC) in Kazakhstan has pioneered guidance on the requirements for opening a bank account for a VASP, setting a benchmark for other jurisdictions to follow.