Virtual Accounts bypass the slow and congested operations of the blockchain itself. You settle transactions between users without any gas fees on a virtual layer and later efficiently settle them on the blockchain.  

On the Virtual Account level, the amount is deducted from Customer C's virtual account. This is what the customer sees. On the Blockchain level, the amount is deducted from Customer A's blockchain address because Customer A is the one who owned that 1 ETH in the beginning. This is what you see as the owner of the custodial application.