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

25 Pages Posted: 27 Oct 2023

See all articles by Pietro Saggese

Pietro Saggese

AIT Austrian Institute of Technology GmbH; Complexity Science Hub Vienna

Esther Segalla

Oesterreichische Nationalbank (OeNB)

Michael Sigmund

Oesterreichische Nationalbank (OeNB)

Burkhard Raunig

Austrian National Bank - Economic Studies Division

Felix Zangerl

Austrian Financial Market Authority

Bernhard Haslhofer

Complexity Science Hub Vienna

Date Written: September 28, 2023

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.

Keywords: Blockchain, Proof of Solvency, Virtual Asset, Cryptoasset, VASP, Accounting, Auditing, Regulation

JEL Classification: C81, F31, G15, G20, G33, M41, 033

Suggested Citation

Saggese, Pietro and Segalla, Esther and Sigmund, Michael and Raunig, Burkhard and Zangerl, Felix and Haslhofer, Bernhard, Assessing the Solvency of Virtual Asset Service Providers: Are Current Standards Sufficient? (September 28, 2023). Available at SSRN: https://ssrn.com/abstract=4586682 or http://dx.doi.org/10.2139/ssrn.4586682

Pietro Saggese (Contact Author)

AIT Austrian Institute of Technology GmbH ( email )

Donau-City-Straße 1
Vienna, 1220
Austria

Complexity Science Hub Vienna ( email )

Josefstädter Straße 39
Vienna
Austria

Esther Segalla

Oesterreichische Nationalbank (OeNB) ( email )

Otto-Wagner-Platz 3, PO Box 61
Vienna,
1010 Vienna, A-1011
Austria

Michael Sigmund

Oesterreichische Nationalbank (OeNB) ( email )

Otto-Wagner-Platz 3, PO Box 61
Vienna,
1010 Vienna, A-1011
Austria

Burkhard Raunig

Austrian National Bank - Economic Studies Division ( email )

POB 61
Vienna, A-1011
Austria
+43 1 404 20 7219 (Phone)
+43 1 404 20 7299 (Fax)

Felix Zangerl

Austrian Financial Market Authority ( email )

Austria

Bernhard Haslhofer

Complexity Science Hub Vienna ( email )

Josefstädter Straße 39
Vienna
Austria

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