Nested service

A service, such as a smaller exchange, OTC desk, payment processor or broker, that conducts some or all of its virtual-asset activity through accounts held at a larger exchange or other service provider. It may also operate its own wallets and on-chain infrastructure, using the host for liquidity, trading or settlement. The host's on-chain transactions may therefore reflect the activity of the nested service rather than identify its underlying customers.

The host's customer records may identify the nested business through business due diligence (KYB), but some services operate through accounts registered to individuals, obscuring the commercial relationship and the identity of the end customers. Host records, including deposit addresses, timestamps and amounts, can still help reconstruct activity, but identifying the underlying customers may require additional records from the nested service, which may be unavailable or difficult to obtain.

Nested relationships create money-laundering risks because the host may have limited visibility into the nested service's customers and transactions. The FATF treats these arrangements as analogous to correspondent banking relationships and calls for enhanced due diligence. In practice, gaps in licensing, supervision and cross-border enforcement can leave such activity inadequately monitored.