Assessing the Solvency of Virtual Asset Service Providers: Are Current Standards Sufficient?

TL;DR

The paper tackles the solvency assessment of Virtual Asset Service Providers (VASPs) by proposing a cross-source approach that triangulates on-chain wallet data, balance sheets, and supervisory records. It empirically analyzes 24 Austrian VASPs, classifies their service offerings, and focuses on four VASPs to compare on-chain cryptoasset holdings with off-chain balance-sheet data, finding consistency for only two and signaling significant data gaps. The study highlights that VASPs function more like brokers, money exchangers, or funds than traditional banks, and identifies major data challenges such as wallet management practices, attribution, and lack of granular asset categorization. It concludes with concrete recommendations to improve on-chain and off-chain reporting and proposes cryptographic methods to enable more reliable, frequent, and privacy-preserving proofs of solvency, aiming to support regulators and auditors in monitoring financial stability in the VASP sector.

Abstract

Entities like centralized cryptocurrency exchanges fall under the business category of virtual asset service providers (VASPs). As any other enterprise, they can become insolvent. VASPs enable the exchange, custody, and transfer of cryptoassets organized in wallets across distributed ledger technologies (DLTs). Despite the public availability of DLT transactions, the cryptoasset holdings of VASPs are not yet subject to systematic auditing procedures. In this paper, we propose an approach to assess the solvency of a VASP by cross-referencing data from three distinct sources: cryptoasset wallets, balance sheets from the commercial register, and data from supervisory entities. We investigate 24 VASPs registered with the Financial Market Authority in Austria and provide regulatory data insights such as who are the customers and where do they come from. Their yearly incoming and outgoing transaction volume amount to 2 billion EUR for around 1.8 million users. We describe what financial services they provide and find that they are most similar to traditional intermediaries such as brokers, money exchanges, and funds, rather than banks. Next, we empirically measure DLT transaction flows of four VASPs and compare their cryptoasset holdings to balance sheet entries. Data are consistent for two VASPs only. This enables us to identify gaps in the data collection and propose strategies to address them. We remark that any entity in charge of auditing requires proof that a VASP actually controls the funds associated with its on-chain wallets. It is also important to report fiat and cryptoasset and liability positions broken down by asset types at a reasonable frequency.

Figures (10)

• Figure 1: Virtual Asset Service Provider. VASPs hold virtual assets in custody, transfer them, and facilitate their purchase and sale against fiat currencies and other virtual assets. Customers can interact with them by depositing or withdrawing cryptoassets through DLT-based transactions, or fiat currency via commercial banks.
• Figure 1: The Austrian VASP landscape. (\ref{['fig:1']}) histogram showing how many services VASPs offer; (\ref{['fig:2']}) histogram showing how many DLTs VASPs utilize.
• Figure 2: The Austrian VASP landscape. Subfigure (\ref{['fig:VASP_FMA_features']}) shows the number of VASPs registered for each of the five service categories described above. Most of the VASPs offer V2F-Exchange (N = 20), and offer more than one service, such as custody (N = 15). Subfigure (\ref{['fig:VASP_tokens']}) reports how many VASPs offer services related to bitcoin (N = 20), ether (N = 16), and other relevant cryptoassets. Most VASPs exploit multiple DLTs.
• Figure 3: VASPs categorization by their service offering. We use a hierarchical agglomerative clustering approach to categorize VASPs. The two largest groups are VASPs that facilitate the exchange of virtual assets without offering custody ( ) and offer consulting services ( ). The others offer custody and exchange services ( ), are payment processors ( ), or implement trading platforms ( ).
• Figure 4: Comparison of traditional financial intermediaries with VASPs. Circles on the left represent VASPs, divided into groups as described in Figure \ref{['fig:dendrogram']}, while on the right are traditional financial intermediaries. Links point to the financial functions offered by each financial intermediary. VASPs are most similar to money exchanges, brokers, and funds, rather than banks. The colors in the circles highlight what traditional intermediary each group is most similar to.