The Critical Relationship Between Virtual Asset Service Providers and Traditional Financial Institutions

SEDA Experts
3d
3 min read

As digital currencies, blockchain, and DeFi platforms reshape finance, collaboration between virtual asset companies and traditional banks has become essential. This partnership drives innovation, ensures regulatory compliance, enhances stability, and protects consumers.

Why the Relationship Matters

Virtual asset firms—exchanges, wallets, and blockchain platforms—offer faster, cheaper, and more inclusive financial services. Yet without the infrastructure and regulatory expertise of banks, they face risks like fraud and volatility. Banks bring decades of experience in compliance and risk management. By partnering with VASPs (Virtual Asset Service Providers), they gain access to new markets, while VASPs benefit from banking services, liquidity, and credibility.

Supervisory Agency Expectations

Global supervisory agencies have recognized the importance of regulating virtual assets to prevent financial crimes and ensure market integrity. The Financial Action Task Force (FATF), for example, has issued comprehensive guidelines requiring VASPs to adhere to anti-money laundering (AML) and counter-terrorist financing (CFT) standards. These include customer due diligence, transaction monitoring, and reporting suspicious activities.

In the United States, multiple agencies oversee aspects of virtual asset regulation:

FinCEN (Financial Crimes Enforcement Network) classifies many VASPs as money services businesses (MSBs), requiring them to register and comply with the Bank Secrecy Act (BSA).
SEC (Securities and Exchange Commission) may regulate certain digital assets as securities, subjecting them to securities laws.
CFTC (Commodity Futures Trading Commission) oversees derivatives and commodities, including some crypto assets.
OCC (Office of the Comptroller of the Currency) has issued guidance allowing banks to custody digital assets and engage with blockchain networks.

These agencies expect VASPs to implement robust compliance programs, conduct risk assessments, and maintain transparency. Failure to meet these expectations can result in penalties, loss of licenses, and reputational damage.

Licensing and Registration Requirements

Licensing and registration are foundational to legitimizing virtual asset operations and integrating them into the broader financial system. In the U.S., VASPs must register with FinCEN as MSBs and comply with AML/CFT obligations. Depending on their services, they may also need state-level money transmitter licenses, which vary widely in scope and complexity.

Internationally, licensing regimes differ. The European Union’s Markets in Crypto-Assets (MiCA) regulation, set to take effect in 2024, will require crypto firms to obtain licenses and meet stringent disclosure and governance standards. In Singapore, the Monetary Authority of Singapore (MAS) mandates licensing under the Payment Services Act, while Japan’s Financial Services Agency (FSA) requires registration and compliance with AML laws.

These licensing frameworks serve multiple purposes:

Consumer Protection: Ensuring that firms operate transparently and securely.
Market Integrity: Preventing manipulation and ensuring fair practices.
Financial Stability: Monitoring systemic risks and enforcing prudential standards.

Licensing also facilitates cooperation between VASPs and banks. Financial institutions are more likely to engage with licensed entities that demonstrate regulatory compliance and operational maturity.

Building Trust and Collaboration

Despite the potential benefits, relationships between VASPs and banks have historically been strained. Concerns over regulatory ambiguity, reputational risk, and compliance burdens have led many banks to avoid servicing crypto firms. This has created a “de-risking” environment, where legitimate VASPs struggle to access basic banking services.

To overcome these barriers, both sides must invest in trust-building:

Transparency: VASPs should proactively share compliance policies, audit results, and risk management practices.
Education: Banks must understand the nuances of blockchain technology and virtual assets to assess risks accurately.
Dialogue: Regular engagement between regulators, banks, and VASPs can clarify expectations and foster mutual understanding.

Some jurisdictions have taken proactive steps. Switzerland’s FINMA has developed clear guidelines for crypto firms, enabling smoother bank relationships. In the U.S., the OCC’s guidance on digital asset custody has encouraged banks to explore crypto partnerships.

Looking Ahead

As virtual assets go mainstream—through CBDCs, tokenized securities, and DeFi—traditional finance and digital innovation will converge. Regulators will refine frameworks, banks will expand crypto services, and VASPs will evolve into regulated entities. Success depends on transparent, compliant collaboration.

In conclusion, the fusion of virtual and traditional finance marks a paradigm shift. Through cooperation, regulation, and licensing, both sectors can unlock new opportunities while safeguarding the financial system.

EXPERT INVOLVED

Kenneth Simmons

Kenneth Simmons, with over 30 years of industry experience as Executive Vice President at leading financial institutions, and at regulatory agency such as OCC and FDIC, is a top expert in regulatory compliance, anti-money laundering, bank secrecy act, and financial crimes risk management.