The term VASP “blockchain” is often used interchangeably with “decentralized finance” (DeFi). It entails a worldwide system where users can conduct any and all monetary transactions independently of traditional financial institutions. In contrast, DeFi is an inherently biased and unregulated space. In the unfortunate event that things go awry, users have no recourse to the law or other forms of support. To ensure the industry brings more confidence and strength, several blockchain advocates embrace the concept of regulation. When it comes to implementing DeFi laws in the network, VASP is one such initiative.
How are digital assets defined?
To put it simply, an asset is anything that may be owned by an individual or a group and has resale value. Similarly, a Virtual Asset is something of value to its owner or owners that exists solely in digital form. Today, cryptocurrency tokens are the most widely used Virtual Assets. First, FATF has given legal criteria to define Virtual Assets in preparation for the implementation of rules on DeFi and cryptocurrencies.
VASP applies to any and all organizations that meet the criteria set forth in the FATF affidavit. This would allow consumers and businesses to follow the law and complete legislative procedures in accordance with VASP. Whether or not a cryptocurrency, token, NFT, stablecoin, ICO, IEO, DEX, CEX, or swap is authorized by law cannot be verified by a user without VASP and FATF guidelines.
VASP’s Historic Beginnings
The common user has no clear rules or guidance to follow while interacting with cryptocurrencies. The White Paper and the technical description of the blockchain are available for people to review, however they are written in technical jargon and are not designed for the average reader or stakeholder. However, problems like bankruptcies, investment hazards, hackers, and other threats are constant companions for anyone involved in bitcoin trading. A victim of an incident has no way of knowing if they are reporting the incident to the appropriate authorities or taking legal action.
Therefore, in 2019, the Financial Action Task Force (FATF) published a study titled Guidance for Vas and Virtual Asset Service Providers. The purpose of the report was to provide criteria for recognizing a digital thing as a Virtual Asset. The purpose of this research is to present a framework of the pertinent data on the topic of regulatory standards for Virtual Asset businesses.
In other words, what is the Financial Action Task Force?
The acronym FATF refers to the Financial Action Task Force, an international group charged with developing a framework for regulating financial institutions and products. The Financial Action Task Force’s primary responsibility is to investigate and recommend legislative responses to financial crimes including Money Laundering. In 1989, a group of governments formed the Financial Action Task Force (FATF) as an intergovernmental agency, inviting member countries and individuals to work and chair the business. For all its member countries, the Financial Action Task Force (FATF) is responsible for creating legislation covering financial procedures and processes.
Once the countries have been inspected, they are given a ranking based on how well they comply with the FATF standard. One’s trade and economic situation can be greatly impacted by the pressure of all other FATF member countries based on one’s FATF ranking. FATF’s recommendations are not binding on any government at any level. In contrast, countries with a low FATF rating may be barred from participating in lucrative trade deals and receiving international investment. The international DeFi and Blockchain industries will be profoundly affected by FATF’s recent proposals regarding Virtual Assets.
The VASP Criteria of the FATF
Under the VASP program, FATF has established the following conditions for any interested party or legal entity that is not registered with any other legal body and fulfills the following functions:
- The trading of Virtual Assets for Real World Money.
- Buying and selling in which virtual currencies are involved with the intention of transferring value.
- Virtual Assets can only be bought, sold, or traded in one direction.
- Putting away, filing away, or managing Virtual Assets for some purpose, either known or unknown, that gives them complete authority over those Virtual Assets.
- Participating in a financial transaction or service in any capacity, whether as a seller, a buyer, a neutral third party, etc.
- Any financial asset or operation not covered by the aforementioned categories should be tested in accordance with VASP and FATF rules.
- Given the uncharted territory of the DeFi industry and all the ambiguities, the foregoing rules apply worldwide and broadly.
Define the term “digital asset entity.”
Everyone should be familiar with DAE, or Digital Asset Entity, in order to fully grasp the VASP. The DAE is a for-profit company offering services or management of virtual assets. Given the proliferation of unregulated businesses offering Virtual Asset services, such as online casinos, daily fantasy sports platforms, and other start-up hubs, it is imperative that these businesses be held to a higher standard. It’s important to note that DAE under VASP also protects Bitcoin ATMs and other decentralized cryptocurrency exchanges. Virtual Asset Entity (VAE) is another name for DAE.
A person who purchases digital assets.
Some users are linked to these businesses without proper registration or identification, much as the commercial enterprises that operate autonomously in the DeFi ecosystem. As a result, the FATF has included a term for Digital Asset Consumer (DAC) under the VASP recommendations.
Any DAE that makes use of a monetary institution like a bank is referred to as a DAC. In a 2020 court case against Safra Bank, the US Department of the Treasury formally adopted the term “DAC.” Meanwhile, the case’s judge, the Office of Comptroller of Currency, ruled in favor of the US Treasury Department and issued a cease-and-desist order against Safra Bank for its involvement in virtual asset money laundering.
Exactly what does VASP, or Virtual Asset Service Provider, mean?
The Financial Action Task Force (FATF) provides a formally written definition of Virtual Assets and Virtual Assets Service Providers. Financial agencies and government authorities can use the VASP’s recommendations and rules for auditing cryptocurrencies and Virtual Assets on page 109 of its 2019 report. Virtual Assets and VASPs can now be checked for potential violations of anti-money-laundering, counter-terror financing, and countering the funding of terrorism regulations using a standardized approach. All member countries of the Financial Action Task Force (FATF) must adhere to the FATF’s requirements on the VASP. Virtual Assets do not include digital representations of real-world money, securities, or other financial assets.
If VASP is implemented, how would it influence DeFi?
Without a central authority to impose laws, the DeFi, or decentralized finance, ecosystem would not exist. However, the young market does nothing to defend the interests and rights of small and individual investors because it is so free and autonomous. Therefore, it might be a welcome development if there is evidence of at least some level of conformity with regulations. However, there are many who support cryptocurrencies but are concerned that VASP may allow governments and centralized authorities to gradually gain control over the DeFi industry through backdoors.
Notably, VASP is a highly publicized effort to bring the decentralized market and businesses into the ambit of financial rules. However, it is unclear what share of the blockchain business and products will be covered by VA and VASP, and how broadly the FATF advice would apply to the DeFi industry. There is also a high possibility that Central Banks and financial agencies would look to VASP as a model for enacting stringent legislation of the DeFi sector inside their own jurisdictions.
Can VASP be Used with NFTs?
In 2021, the FATF revised the VASP report to clarify whether or not NFTs fell under its purview. In accordance with the new recommendations, the VASP recommendations for NFTs are as follows:
- The NFTs are one of a kind and can never be replaced.
- NFTs are not a form of currency or investment but are instead used as digital collectibles.
It follows that VASP does not apply to NFTs that meet both of the aforementioned criteria. But the seeming simplicity of the inquiry belies the complexity of the solution. VASP could be used to test out NFTs for secondary trading. VASP implementation on NFTs is more likely to occur on a case-by-case basis.
In the past, cryptocurrency attorney Gabriel Shapiro has stated that NFTs are neither special or one-of-a-kind. He also noted that the mere presence of one NFT does not establish authorship or copyright. Thus, there are no longer any restrictions on who can make a similar NFT or how many there can be. He went on to say that any developer can replicate an existing NFT on a blockchain because there are no technical barriers preventing this.
According to Shapiro, the idea that NFTs are inherently non-fungible is essentially dogma that changes depending on the circumstances. However, as NFTs can be used as either a payment method or a collectible, it might be difficult to determine their intended use. Some potential outcomes involving NFTs are as follows:
- NFTs have become more popular as a means through which users can establish a personal digital identity and as gaming peripherals.
- Still others are interested in amassing the hottest NFT collections as an investment opportunity.
- The value of NFTs can be increased when they are used as collateral to secure loans or when they are sold on the secondary market.
All NFTs bought with the intention of making a profit or investing in the asset class are included in the VASP rules and are considered Virtual Assets. On the other hand, the marketplaces where NFT investments can be bought and sold will be considered Value-Added Service Providers.
Can Stablecoins Be Included in VASP?
Stablecoins are a subset of cryptocurrencies that maintain a stable value by linking its supply to a stable asset, be it a fiat currency or another cryptocurrency. In spite of their widespread adoption, banking authorities generally view stablecoins as high-risk investments. Stablecoins are digital currencies that are more compliant with regulations and tend to be less volatile than other digital currencies. In this context, regulated stablecoins like Tether are not strictly speaking Virtual Assets.
The financial authorities responsible for these stablecoins, on the other hand, are under attack from the Financial Action Task Force and the Vault Anti-Money Laundering Working Group. MKR tokens and other stablecoins regulated by algorithms or decentralized protocols like them require a more nuanced and thorough application of FATF regulations. In accordance with FATF, the following decentralized stablecoins will be subject to its regulations:
- Stablecoins are produced via decentralized protocols and are ultimately decentralized.
- Specifically, stablecoin exchanges and other marketplaces where they can be bought and sold.
- Stablecoins can be stored and managed with the help of any custodial wallet service, meaning one in which the private key remains under the control of the service provider.
the benefits of VASP
There isn’t unanimity among DeFi supporters on how they feel about VASP. Making a list of pros and negatives might help you weigh the benefits and drawbacks of the FATF’s suggestions for the DeFi industry.
There are now thousands of cryptocurrencies, and more are created every day. On the other hand, neither credibility nor experience are required to launch a cryptocurrency venture. So many con artists profit from the lax oversight that VASP may help improve.
Members of the bitcoin community or users who feel mistreated by cryptocurrency organizations have no recourse in the event of a disagreement. But VASP will help those who have been impacted make a strong case.
Users will be able to investigate the authenticity of a DeFi enterprise thanks to the statutory definitions of Virtual Assets and Virtual Asset Support Providers. With the help of VA and VASP, the country’s Central banks and financial regulators can incorporate the DeFi sector into the country’s legislative framework.
As a result of VASP, all parties involved can rest comfortable that they are not complicit in any kind of illicit scheme or criminal activity. Blockchain participants will face little monetary and operational risks.
Since Virtual Assets and crypto businesses will now be defined legally, commercial financial institutions will be more likely to participate in and invest in DeFi. The VASP can also make using cryptocurrencies and DeFi more widespread by reducing security risks for consumers.
Auditing firms, both public and private, can benefit from VASP since it provides a legally binding standard and screening criteria for both financial and technical audits. The VASP can bridge the gap between DeFi and TeFi businesses, such as banks, providing a solid foundation for improved safety and productivity.
For the widespread implementation of DeFi applications, VASP can also serve as a model for government agencies and departments. VASP can also help private companies break into new foreign markets by letting them launch public, permissionless B2C DeFi channels.
Contraindications of VASP
Many in the cryptocurrency world remain dubious of the VASP effort despite its many advantages. The following are therefore some of the most significant dangers associated with implementing VASP on DeFi:
Different countries may be compelled by FATF to develop standards for DeFi laws, which may have an impact on the platform’s quality of users and efficiency. VASP can be a hindrance to the decentralized nature of businesses and goods dealing in digital currency, which can have a negative impact on the interests of those involved in the sector.
VASP has the ability to mold future initiatives in a way that leaves little possibility for innovation, which can stunt the program’s development and eventual replacement. To add insult to injury, VASP has the potential to expand the number of legal hurdles that NFT, stablecoin, and cryptocurrency users must jump through, all while raising associated costs.
Because of their complexity, the VASP recommendations may be beyond the understanding of the average person. Profit margins in DeFi markets are typically much higher than in stock and traditional financial markets, although VASP can help bring them down.
It is FATF’s hope that their work on Virtual Asset Service Providers and Virtual Assets will help bring order to the Wild West that is the DeFi industry. The pressure from its member countries gives the FATF’s advice some weight, but it is not a legally binding regulator. Time will tell if FATF is able to effect positive change within the DeFi or if the organization maintains its autonomy in spite of the pressure.