Blockchain Security Firm CipherTrace Clarifies how Virtual Asset Service Providers, Money Service Businesses are Categorized by Regulators

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Blockchain security firm CipherTrace recently explained and discussed the differences between virtual asset service providers (VASPs), money service businesses (MSB), money transmitters, digital asset customers, and how they impact crypto-related compliance measures.

CipherTrace noted that cryptocurrency, digital assets, convertible virtual currency, and other terms seem to all describe the same or similar concepts. The blockchain firm pointed out that a cryptocurrency exchange may also be called a Virtual Asset Service Provider (VASP), Virtual Asset Entity, Digital Asset Customer (DACs), Money Service Business (MSB), or other names “depending on the context.”

Although some industry professionals might be inclined or prefer to refer to all these entities related to digital assets as VASPs—the same way they refer to all virtual assets as “crypto”—there are certain “differentiators between the different Digital Asset Entity typologies that affect how that entity is regulated,” CipherTrace explained.

As noted by CipherTrace:

“A Digital Asset Entity is an umbrella term for a range of businesses built on cryptocurrency transactions.” 

Digital Asset Entities may include Virtual Asset Service Providers (VASPs) like digital currency exchanges and ATMs, which are considered financial institutions or service providers “in their own right, in addition to gambling sites, incubators, and other entities that use crypto but are not always classed as financial institutions,” CipherTrace clarified. The blockchain company also mentioned that alternative names might include Virtual Asset Entity and Crypto Asset Entity.

CipherTrace further noted:

“A Digital Asset Customer is any Digital Asset Entity that uses the services of a bank or other formal financial institution. DAC was first used to describe a broad grouping of cryptocurrency-based customers in the US Department of the Treasury’s OCC enforcement action against M.Y. Safra Bank in early 2020.”

On January 30, 2020 the Office of the Comptroller of the Currency (OCC) reportedly issued the very first crypto-related enforcement action against a US-based bank—M.Y. Safra Bank (MYSB), which is located in New York City. As confirmed by CipherTrace, the enforcement action involved a cease and desist order that was focused on deficient or inadequate anti-money laundering (AML) measures for compliance and monitoring of the institution’s digital asset customers (DAC). As explained by CipherTrace, these entities included virtual currency exchanges, Bitcoin ATM operators, and virtual (over-the-counter) OTCs, along with other crypto-related companies

CipherTrace also mentioned that when a crypto-asset entity engages in various financial activities with digital assets, AML/CFT and other requirements might apply to it “for the entity’s role as a money transmitter.” These crypto-asset entities may be called Virtual Asset Service Providers (VASPs) or money transmitters “engaged in convertible virtual currency, depending on the regulatory or policy making body.”

The Financial Action Task Force (FATF) notes that VASPs are companies or businesses which carry out at least one of following functions or actions on behalf of their customers:

  • exchange between virtual assets and fiat currencies;
  • exchange between one or more forms of virtual assets;
  • transfer of virtual assets;
  • safekeeping and/or administration or virtual assets or instruments enabling control over virtual assets;
  • participating in and provision of financial services related to an issuer’s offer and/or sale of a virtual asset;

This definition “encompasses a range of crypto businesses, including exchanges, ATM operators, wallet custodians, and hedge funds,” CipherTrace confirmed. It added that the FATF suggests that VASPs be “subject to the same stringent AML/CTF and KYC requirements as traditional financial institutions.”

(Note: for more details on these concepts and terminology, check here.)