Virtual asset service provider (VASP)

Table of contents

What is a virtual asset service provider (VASP)?

A virtual asset service provider (VASP) is an entity or business that facilitates activities involving virtual assets, such as cryptocurrency transactions. VASPs include cryptocurrency exchanges, wallet providers, and other entities offering services like trading, transferring, or safekeeping digital assets. These providers play a crucial role in the cryptocurrency ecosystem by enabling users to access and manage virtual assets.

The rise of cryptocurrencies has made VASPs a focal point for regulators, law enforcement, and blockchain intelligence efforts. As intermediaries in the digital asset space, VASPs are essential for ensuring compliance with anti-money laundering (AML) and counter-terrorism financing (CTF) regulations.

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What are the key functions of VASPs?

Virtual asset service providers (VASPs) offer a variety of services that facilitate the use and exchange of cryptocurrencies. Their primary functions include:

Cryptocurrency exchanges: Allowing users to buy, sell, and trade virtual assets; facilitating the conversion of cryptocurrencies into fiat currency or other digital assets‍
Wallet services: Providing secure storage solutions for cryptocurrencies, including custodial and non-custodial wallets
Transfer services: Enabling the movement of virtual assets between wallets, both on and off blockchain networks
Initial coin offerings (ICOs) and token sales: Assisting in raising funds through the issuance of tokens or digital assets
Custodial services: Safeguarding virtual assets on behalf of clients, often incorporating advanced security measures

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How does law enforcement interact with VASPs in crypto investigations?

VASPs, such as cryptocurrency exchanges and wallet providers, act as intermediaries in the digital asset ecosystem, making them essential partners for law enforcement in crypto investigations. Here are a few ways law enforcement agencies typically interact with VASPs.

Requesting user and transaction data

VASPs collect Know Your Customer (KYC) information and transaction records to comply with regulatory requirements. In investigations, law enforcement can leverage this data to identify users, trace illicit funds, and analyze patterns of criminal activity by reviewing transaction histories.

Responding to subpoenas and warrants

Law enforcement agencies often issue legal requests to VASPs for information or access to accounts as part of their investigations. These include:

Subpoenas: Require VASPs to provide specific user data or transaction details.
Search warrants: Grant access to user accounts or assets when criminal activity is suspected.
Freeze orders: Mandate that VASPs freeze accounts linked to suspected illicit activities to prevent further transactions.

Collaborating on real-time investigations

In urgent cases, such as ransomware attacks or terrorism financing, law enforcement may work closely with VASPs to block suspicious transactions before they reach illicit destinations or to facilitate asset recovery of stolen or fraudulently acquired cryptocurrencies.

Sharing suspicious activity reports (SARs)

VASPs are typically required to file suspicious activity reports (SARs) for transactions that meet specific risk criteria. Law enforcement then uses these reports to prioritize high-risk cases or to build cases, using SARs as part of the evidence chain.

Facilitating cross-border collaboration

Cryptocurrencies operate globally, often necessitating international cooperation. Law enforcement collaborates with VASPs across jurisdictions to address cross-border crimes involving funds that move between VASPs in different countries and to facilitate extradition and prosecution in international investigations.

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How do regulators interact with VASPs?

Regulators interact with VASPs to ensure compliance with financial regulations, promote transparency, and maintain the integrity of the cryptocurrency ecosystem. These interactions are critical for addressing risks such as money laundering, terrorism financing, and fraud while supporting innovation and market stability. Here's how regulators typically engage with VASPs.

Setting regulatory frameworks

Regulators establish the rules and guidelines that VASPs must follow to operate legally within their jurisdiction — including the implementation of anti-money laundering (AML) and counter-terrorism financing (CTF) measures like Know Your Customer (KYC) protocols and transaction monitoring. Regulators also set licensing requirements for VASPs and enforce motions like the Financial Action Task Force (FATF) Travel Rule, which obligates VASPs to share sender and receiver information for transactions above a certain threshold.

Who needs a VASP license?

A VASP license is generally required for any business that provides exchange, custody, transfer, trading, issuance, or safekeeping of virtual assets on behalf of customers. This includes services such as converting crypto to fiat, holding customer wallets, facilitating token transfers, or operating trading platforms. Examples include crypto exchanges, custodians, OTC desks, payment processors that handle digital assets; and companies that issue or manage virtual tokens for users. Licensing requirements differ by jurisdiction. For example, under the EU MiCA framework, most crypto asset service providers must obtain authorization. In the United States, many businesses that transmit virtual assets must register as money services businesses and may need additional state-level approvals.

Monitoring and auditing

Regulators also oversee VASP activities to ensure adherence to established rules and identify any potential non-compliance. They do this through transaction reporting — including requiring VASPs to submit suspicious activity reports (SARs) — conducting regular audits to ensure robust compliance controls are in place, and using blockchain intelligence tools like TRM Labs to identify and disrupt high-risk activities.

Enforcing compliance

Regulators take action against VASPs that fail to meet compliance standards or engage in illicit activities. They can do so by enforcing penalties and sanctions, issuing cease-and-desist orders if needed, and putting out public warnings to caution consumers about high-risk or non-compliant VASPs.

Supporting global standardization

Regulators collaborate internationally to harmonize standards and ensure consistent oversight of VASPs operating across borders. For example, adopting recommendations from FATF to align with global anti-money laundering (AML) and counter-terrorism financing (CTF) standards.

Encouraging innovation and market growth

Regulators aim to strike a balance between oversight and fostering innovation in the cryptocurrency industry. Some regulators also provide regulatory sandboxes that allow VASPs to test new technologies and business models under supervision.

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Core KYC/AML requirements for VASPs

1. Customer due diligence (CDD)

VASPs must verify customer identity before establishing a relationship. CDD typically includes collecting identifying information such as name, date of birth, and address, and verifying documents. An example is validating a government ID and comparing it to a customer selfie before allowing account funding.

2. Enhanced due diligence (EDD)

When higher-risk factors are present, VASPs must exercise greater scrutiny. EDD may be triggered by large transaction volumes, customers from higher-risk jurisdictions, politically exposed persons, or complex business structures. Examples include requesting source-of-funds documentation or performing additional screening against sanctions and adverse media.

3. Ongoing monitoring

VASPs must continuously monitor customer activity to detect unusual or suspicious patterns. This includes reviewing transaction behavior, identifying deviations from expected activity, and using automated tools or manual review to flag anomalies. An example is detecting repeated high-value transfers to newly created external wallets.

4. Suspicious activity reporting (SAR or STR)

When a VASP identifies activity that may involve illicit behavior, it must file a report with the appropriate financial intelligence unit. Examples include transactions structured to avoid thresholds or transfers linked to known illicit entities.

5. Record keeping and retention periods

VASPs must maintain records that document customer identity, transaction details, and due diligence measures for legally mandated periods. Retention rules vary by jurisdiction, but many require records to be retained for five to ten years after the business relationship ends. An example is storing KYC documentation and complete transaction logs for regulators to review during audits.

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Key challenges for VASPs

Regulatory uncertainty: Rules for virtual asset services shift frequently and differ across jurisdictions. VASPs can mitigate this by maintaining a compliance framework that adapts to new guidance, implementing Travel Rule solutions that meet multiple regulatory standards, and conducting regular regulatory horizon scans.
Security risks: VASPs face threats such as wallet breaches, phishing, private key compromise, and infrastructure attacks. Mitigation approaches include strong key management practices, penetration testing, incident response playbooks, and continuous monitoring for anomalous on-chain activity.
Compliance burden: Meeting KYC, AML, sanctions, and reporting requirements can be challenging. VASPs reduce this burden through automated KYT and transaction monitoring tools, streamlined onboarding workflows, and data-driven risk scoring that helps allocate compliance effort effectively.
Market volatility: Rapid price swings and liquidity constraints can affect customer behavior and platform stability. Mitigation includes robust treasury controls, stress testing of operational processes, and clear communication of risk policies to customers.‍
Evolving illicit finance techniques: Threat actors use mixers, cross-chain swaps, privacy tools, and complex layering to evade detection. VASPs can respond with advanced analytics, typology-driven alerting, and partnerships with investigative teams that specialize in tracing virtual asset activity.

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What is the future outlook for VASPs?

The future of VASPs is closely tied to the ongoing evolution of the cryptocurrency industry, technological advancements, and regulatory developments. VASPs will play an increasingly central role in ensuring compliance, fostering innovation, and addressing emerging challenges in the digital asset ecosystem.

Increased regulatory oversight

Regulatory scrutiny of VASPs is expected to intensify as governments and international organizations aim to curb financial crimes and ensure market stability.

Global standards: Organizations like the Financial Action Task Force (FATF) are pushing for uniform global regulations, including stricter enforcement of the Travel Rule.
Regional frameworks: Jurisdictions such as the European Union (through MiCA) and the US are developing comprehensive regulatory frameworks tailored to VASPs.
Licensing and audits: More VASPs will need to obtain licenses and undergo regular compliance audits to operate legally.

Expansion of services

VASPs are likely to expand their offerings to cater to the growing demands of the cryptocurrency market.

Integration with decentralized finance (DeFi): VASPs may develop solutions that bridge the gap between centralized platforms and DeFi ecosystems, addressing compliance challenges in decentralized platforms.
Tokenized assets and NFTs: As tokenization becomes more mainstream, VASPs may offer services for managing, trading, and securing tokenized assets and non-fungible tokens (NFTs).
Cross-border transactions: VASPs will enhance support for seamless international transfers while complying with local and global regulations.

Focus on user experience and security

As competition among VASPs increases, user-centric improvements will become a priority.

Enhanced security: VASPs will invest in state-of-the-art cybersecurity measures to protect against hacks and breaches.
Simplified interfaces: User-friendly platforms will attract a broader audience, including newcomers to cryptocurrency.
Self-custody options: Some VASPs may offer hybrid models, allowing users to choose between custodial and non-custodial wallet services.

Collaboration with stakeholders

VASPs will need to continue to strengthen collaboration with regulators, law enforcement, and blockchain intelligence providers to build trust and ensure robust compliance.

Public-private partnerships: Joint efforts between VASPs and government agencies will enhance information sharing, and better enable all parties to effectively address emerging threats.
Cross-border cooperation: As cryptocurrencies transcend borders, international cooperation among VASPs and regulatory bodies will continue to be critical for enforcement.

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Frequently asked questions (FAQs)

1. Are VASPs required to be licensed or registered, and with whom in major jurisdictions?

Yes. FATF Recommendation 15 expects licensing/registration. In the US, most VASPs qualify as Money Services Businesses and must register with FinCEN and comply with the BSA. In the EU, 5AMLD requires registration with national authorities, and MiCA introduces licensing for crypto asset service providers.

2. What are the core elements of a VASP KYC process?

Customer identification and verification (document and data checks), risk-based CDD with EDD for high-risk profiles, ongoing transaction monitoring, suspicious activity/transaction reporting, and record keeping for prescribed retention periods.

3. Why is KYC important for VASPs beyond compliance?

It reduces fraud and identity theft, builds customer and partner trust, improves platform safety, and supports accurate regulatory reporting that enables faster investigations.

4. What happens if a VASP doesn’t follow KYC/AML rules?

Regulators can impose penalties and sanctions, issue cease-and-desist orders, restrict operations or licenses, and publish warnings. Non-compliance can also lead to de-banking, partner offboarding, and reputational damage.

5. Which services make an entity a VASP under FATF?

Exchanging virtual assets for fiat, VA-to-VA exchange, transfer of virtual assets, safekeeping/administration or instruments enabling control, and participation in/provision of financial services for an issuer’s offer or sale of a virtual asset.

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Last updated: January 13, 2026