In a previous article, weeks ago, I was explaining what a VASP was. Today we are going to expand this concept and we will also talk about the CASP, for those interested in learning about the world of crypto assets, and especially their regulation.
The Emergence of VASPs:
The concept of VASPs emerged alongside the rise of Bitcoin, the first decentralized cryptocurrency. As Bitcoin gained popularity, the need for platforms to exchange and trade it became evident. The earliest exchanges acted as intermediaries between buyers and sellers of Bitcoin, laying the foundation for what would later become known as VASPs.
Phases of VASP Development:
Pioneering Exchanges: The first cryptocurrency exchanges, such as Mt. Gox (established in 2010), set the stage for the industry. These exchanges were often run by tech enthusiasts and operated in a relatively unregulated environment.
Mt. Gox was one of the earliest and most significant cryptocurrency exchanges, established in 2010. Based in Japan, it once dominated the Bitcoin market, handling the majority of global Bitcoin trades. However, in 2014, it suffered a massive hack that resulted in the loss of approximately 850,000 Bitcoins, leading to its bankruptcy and eventual closure. This event exposed vulnerabilities in exchange security and highlighted the need for regulatory measures. The Mt. Gox incident remains a pivotal moment in the history of cryptocurrency exchanges, underscoring the importance of security, transparency, and the evolving nature of the crypto industry.
Regulatory Challenges: As the popularity of cryptocurrencies grew, regulatory bodies around the world started taking notice. The lack of clear regulations led to a number of issues, including security breaches and market manipulation. This prompted the need for stronger oversight and compliance measures.
Institutionalization: With regulatory frameworks in development, institutional players began to enter the scene. VASPs diversified their offerings to include not only spot trading but also derivatives, lending, and custody services. This phase brought both credibility and additional regulatory scrutiny.
Global Expansion: Cryptocurrency exchanges and VASPs expanded globally, with platforms emerging on every continent. Each region introduced its own regulatory approach, leading to a diverse landscape of compliance requirements.
The crypto ecosystem is an ever-evolving arena, and through its rapid maturation came the need for regulations, recommendations and policies. As with all areas, appropriate jargon is required to explain these changes.
The Financial Action Task Force’s (FATF’s) Recommendation 16, commonly known as the Travel Rule, and the Market in Crypto Assets (MiCA) framework, which falls under the European Commission’s digital finance package, are examples of such changes.
For your info: The Financial Action Task Force (FATF) is the global money laundering and terrorist financing watchdog. It sets international standards that aim to prevent these illegal activities and the harm they cause to society.
The FATF’s latest update describes businesses that provide virtual asset services for or on behalf of another person as a virtual asset service provider (VASP). In contrast, MiCA refers to these businesses as crypto asset service providers (CASPs).
What Is a Virtual Asset Service Provider (VASP)?
As defined by the FATF, VASP activities include:
The exchange between virtual assets and fiat currencies, the exchange between one or more forms of virtual assets, the transfer of virtual assets, the safekeeping and/or administration of virtual assets or instruments enabling control over virtual assets, the participation in and provision of financial services related to an issuer’s offer and/or sale of a virtual asset.
The FATF’s acronym of choice, VASP, carries a similar meaning to crypto exchange service provider (CESP), the term used in Japan, crypto asset secondary service providers (CASSPrs), the term used in Australia, digital asset exchanges, the term used in the US and, crypto asset trading platform (CTP), the term used in Canada.
The FATF’s definition covers the basic activities of an average VASP. However, the definition does not extend to cover crypto advisory services, nor is it as explicit in its terms as the MiCA definition below.
What Is a Crypto Asset Service Provider (CASP)?
As per MiCA, CASP activities include:
The custody and administration of crypto assets on behalf of third parties, the operation of a trading platform for crypto assets, the exchange of crypto assets for fiat currency that is legal tender, the exchange of crypto assets for other crypto assets, the execution of orders for crypto assets on behalf of third parties, the placing of crypto assets, the reception and transmission of orders for crypto assets on behalf of third parties, providing advice on crypto assets.
In summary, if a business provides any of the below services to citizens in Europe, it is deemed a CASP:
Offering custody and administration of crypto assets on behalf of a third party, offering a crypto exchange service or running an exchange, offering crypto advisory services, or information defined as advice on investing in crypto assets. This does not include portfolio management services.
Below we will discuss these similarities and differences and provide insights, so you know how your business fits in these categories.
Challenges Faced by VASPs:
Regulatory Compliance: VASPs have had to navigate a complex and evolving regulatory landscape. Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations have become central to their operations.
Security Concerns: High-profile hacks of exchanges like Mt. Gox and more recent breaches have highlighted the importance of robust security measures for VASPs. Cold storage solutions and enhanced cybersecurity protocols have become industry standards.
Market Volatility: Cryptocurrency markets are known for their extreme volatility. VASPs have had to manage the risks associated with sudden price fluctuations, which can impact trading volumes and user activity.
We are in the evolution with strength and BELOBABA, the VASP licence is already in our pocket and continues advancing towards the future, with a firm step.