Written by: Mankiw Blockchain Legal Services
As of the latest data, cryptocurrency trading volume on centralized exchanges (CEX) reached $4.29 trillion in the first quarter of 2024, a significant increase compared to previous quarters. In contrast, the over-the-counter (OTC) market is primarily aimed at institutional and large individual investors and, although its activity is significant, does not typically reach the trading volume levels of CEXs due to its more private and customized nature. Specific OTC volume data is harder to determine due to a lack of centralized reporting, but the OTC market continues to expand as the overall cryptocurrency market grows.
OTC Trading vs Exchange Trading
In the field of cryptocurrency trading, OTC trading and exchange trading have their own characteristics and are suitable for different types of trading needs and user groups. There are significant differences between the two in terms of liquidity, privacy, price slippage, flexibility, counterparty risk, security, regulations, ease of use and typical users.
1. OTC Trading
OTC trading (over-the-counter trading) refers to transactions conducted directly between two parties, without going through a centralized exchange, and is usually facilitated by an intermediary or OTC trading desk. The biggest advantage of this approach is that it can handle larger transactions, has less impact on market prices, and provides greater privacy and anonymity because transactions are not publicly recorded. In addition, through pre-agreed prices, OTC trading can minimize price slippage for large transactions and provide flexible trading solutions, including customized transaction sizes and specific settlement terms.
However, OTC trading also presents some challenges. Since trading is not conducted on an exchange, participants face a higher risk of counterparty default, and its security relies on the reputation and reliability of the OTC intermediary or trading desk. Generally, OTC trading is less regulated, offers more freedom but less protection, and requires finding a reliable OTC intermediary, and the trading method may not be very user-friendly. Therefore, OTC trading is usually suitable for institutional investors or high-net-worth individuals seeking to transfer large amounts of cryptocurrencies.
2. Exchange trading
In contrast, exchange trading is conducted on a centralized platform, matching buy and sell orders through an order book. This approach provides high liquidity for a variety of cryptocurrencies and is suitable for transactions of different sizes. Exchange trading is transparent and publicly recorded, allowing market visibility, although there is the possibility of price slippage, especially large transactions need to be completed at multiple price levels. The standardized environment of exchange trading has fixed rules and procedures to ensure the standardization of transactions. Due to the protection of a centralized platform, exchange trading has lower counterparty risk, and the security measures taken by the exchange also provide users with greater security, although they may become targets for hackers. Exchange trading is usually regulated, providing additional protection but may have trading restrictions. Its user-friendly interface and additional features such as market analysis tools and trading robots improve the ease of trading.
However, exchange trading also comes with some challenges, such as the possibility that the platform may be subject to regulatory restrictions, making it inaccessible to users in certain regions. In addition, since exchanges need to follow strict KYC (know your customer) and AML (anti-money laundering) regulations, this may affect the privacy of users' transactions. For some traders, the fee structure of the exchange is also a consideration, as it may increase the cost of trading. Overall, exchange trading is more suitable for retail investors and traders of all sizes who seek a convenient and standardized trading environment.
In summary, OTC trading and exchange trading each have their own advantages and disadvantages, and the choice of which method mainly depends on the specific needs and preferences of traders. For those who need to handle large transactions and value privacy and flexibility, OTC trading is an ideal choice. For traders who want to enjoy high liquidity, security and user-friendly interface, exchange trading is more suitable. By understanding the differences between these two trading methods, traders can make a more informed choice based on their own situation to achieve the best trading results.
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Comparison of regulatory frameworks for cryptocurrency OTC transactions
In terms of cryptocurrency regulation, the regulations and regulatory environments of Hong Kong, Singapore and the United States each have their own characteristics. The following is a review of the cryptocurrency regulatory frameworks of these three countries/regions.
Hongkong
Cryptocurrency regulation in Hong Kong is the responsibility of the Securities and Futures Commission (SFC), and the main regulations include the Anti-Money Laundering and Anti-Terrorism Financing Ordinance (AMLO). In Hong Kong, virtual asset trading platforms (VATPs) require compulsory licensing, a pending licensing system, and strict compliance requirements. In terms of anti-money laundering, Hong Kong must comply with the anti-money laundering regulations stipulated by AMLO, focusing on customer asset protection and KYC procedures. The SFC regulates over-the-counter trading activities, and VATP must comply with strict regulatory standards to protect customers. In terms of recent developments, Hong Kong has strengthened supervision under AMLO, focusing on compliance and investor protection, and intercepting funds from illegal channels. In the face of future challenges, Hong Kong needs to balance market development and investor protection to ensure that the regulatory environment adapts to the changing market.
Currently, cryptocurrency exchange shops in Hong Kong are very active, and many shops provide over-the-counter (OTC) services. These transactions usually involve large amounts of money, and customers can buy and sell virtual assets in the store with cash or other forms. Currently in Hong Kong, basically anyone can open an OTC virtual asset shop, which has certain loopholes in Hong Kong's current virtual asset regulatory framework.
On February 8, 2024, the Financial Services and the Treasury Bureau (FSTB) of Hong Kong launched a public consultation to establish a licensing system for over-the-counter virtual asset trading services. Under the proposal, OTC operators need to apply for a two-year license from the Hong Kong Customs. After obtaining the license, persons engaged in virtual asset trading can only exchange virtual assets that are available on at least one Hong Kong-approved trading platform. The FSTB plans to submit a bill on the OTC virtual asset licensing system to the Legislative Council as soon as possible.
The main requirements for OTC virtual asset business operators include:
If operating an entity OTC virtual asset business: having a suitable place for operation in Hong Kong;
If operating an online OTC virtual asset business: having a management office, correspondence address and place for storage of books and records in Hong Kong;
employ at least one qualified compliance officer;
Employ at least one qualified Anti-Money Laundering Reporting Officer;
Having an appropriate corporate structure and experienced and knowledgeable people to run the business;
Conduct business with honesty, fairness and diligence;
Implement appropriate risk management measures, including AML/CFT policies and procedures;
Maintain records of transactions and fund movements and provide a complete list of relevant wallets used by the business.
According to the proposal, OTC virtual asset businesses that obtain a license from the Hong Kong Customs will not be allowed to convert between virtual assets, but will be allowed to provide conversion services between virtual assets and legal tender. If the business needs to convert between legal tender, it will also need to obtain a Money Service Operator license in Hong Kong.
The proposals also provide protections for retail investors, with OTC virtual asset businesses prohibited from offering virtual assets that retail investors cannot buy or sell on SFC-licensed VATPs, or virtual assets that are not issued by stablecoin issuers licensed by the Hong Kong Monetary Authority (HKMA). These restrictions do not apply to those who qualify as professional investors in Hong Kong.
After the proposal comes into effect, existing OTC virtual asset businesses will need to act within a six-month transition period, during which they can continue to operate only if they have submitted a license application within the first three months of the transition period.
Singapore
Cryptocurrency regulation in Singapore is handled by the Monetary Authority of Singapore (MAS) and is primarily regulated under the Payment Services Act (PSA). Any platform that facilitates OTC trading of crypto assets may be considered to provide cryptocurrency services and be regulated by the PSA. For example, the following cryptocurrency-related services are currently regulated as cryptocurrency service providers under the PSA:
Buy or sell cryptocurrencies;
Establishing or operating a cryptocurrency exchange;
Participate in and provide financial services related to the offering and/or sale of cryptocurrencies by issuers;
Transfer or transmit cryptocurrency from a cryptocurrency address;
Directing (or attempting to direct) any person to buy or sell cryptocurrency (without the cryptocurrency service provider actually having access to any funds or DPTs).
If a company provides cryptocurrency services in Singapore, then it will need to obtain one of the two main types of licenses: (i) a Standard Payment Institution license or (ii) a Major Payment Institution license. For a Standard Payment License, the specified threshold is an average of accepting, processing or executing cryptocurrency transactions of up to S$3 million per month in a calendar year. In contrast, if a company intends to provide cryptocurrency services with no transaction volume or capital cap, it should apply for a Major Payment Institution license. This means that a company will need a Major Payment Institution license if the average monthly total value of all transactions through its cryptocurrency services in a calendar year exceeds the S$3 million threshold. Considering that the PSA is intended to safeguard payment service transactions, the process of applying for a license to provide cryptocurrency services can be very long and cumbersome.
In terms of anti-money laundering, PSA requires compliance with AML/CFT procedures, strict customer due diligence and transaction monitoring. MAS regulates OTC trading under PSA, ensuring that market makers and OTC trading platforms have specific requirements. In recent developments, MAS has introduced stricter regulations for DPT service providers, emphasizing the compliance of its regulated services. In the future, Singapore will seek regulatory clarity to address risks associated with cryptocurrencies while promoting innovation.
USA
Cryptocurrency regulation in the United States is handled by multiple agencies, including the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Financial Crimes Enforcement Network (FinCEN), and the Office of National Bank Supervision (OCC).
Under the supervision of these agencies, cryptocurrency trading platforms and over-the-counter traders are subject to strict regulations and requirements.
First, cryptocurrency trading platforms must register with FinCEN as money service businesses (MSBs) and implement comprehensive anti-money laundering and know-your-customer measures, including customer identity verification, transaction monitoring, and suspicious activity reporting (SARs). These measures are designed to prevent money laundering and terrorist financing and ensure that trading platforms meet regulatory standards.
Secondly, the SEC is responsible for regulating cryptocurrency transactions involving securities. If a cryptocurrency is considered a security, the trading platform must comply with the SEC's securities regulations, including registration and disclosure requirements. The CFTC regulates transactions that treat cryptocurrencies as commodities, such as Bitcoin and Ethereum futures contracts. Trading platforms need to comply with relevant commodity futures regulations to ensure market transparency and fairness.
In recent years, the SEC and CFTC have continued to issue guidance documents and enforce regulations to strengthen supervision of the cryptocurrency market. These measures not only focus on investor protection and market integrity, but also strive to establish a clear regulatory framework in the rapidly developing digital asset field.
Regarding recent regulatory developments in the United States regarding virtual assets, California’s Digital Financial Assets Act (DFAL) will come into effect on July 1, 2025. DFAL will regulate “digital financial assets” and require companies engaged in “digital financial asset business activities” to obtain a license from the California Department of Financial Protection and Innovation (DFPI), but there are certain exceptions, similar to New York’s BitLicense. In order to obtain a BitLicense, a comprehensive application must be submitted to the New York State Department of Financial Services, which includes providing detailed information on business operations, compliance policies, anti-money laundering/know your customer procedures, cybersecurity measures, and financial status.
Once California’s DFAL takes effect, it will require over-the-counter cryptocurrency dealers operating in California to obtain a license, along with other companies whose businesses fall into the following categories:
Exchanging or issuing digital financial assets: exchanging, transferring or storing digital financial assets, or issuing redeemable digital financial assets.
Holding electronic precious metals: Holding electronic precious metals or digital certificates on behalf of others indicating their share in precious metals, or issuing shares or digital certificates representing interests in precious metals.
Exchanging Game Currency/Tokens: Exchanging game currency or tokens, either to obtain digital financial assets from the game or application publisher, or for real-world currency.
With the DFAL, California will become the third state to establish a licensing system for crypto assets, following New York and Louisiana.
In the future, the challenges facing the United States include further strengthening regulatory transparency, effectively responding to market manipulation and fraud, and promoting technological innovation and market development while protecting the interests of investors. This requires regulators to continuously improve regulatory policies while maintaining sensitivity to market changes to ensure the competitiveness and leadership of the United States in the global cryptocurrency market.
In general, the similarities and differences in cryptocurrency regulation among Hong Kong, Singapore and the United States are reflected in regulatory agencies, legal frameworks, licensing requirements, anti-money laundering requirements, over-the-counter trading supervision, recent developments, challenges and future directions. The regulatory environment and policies in each region have different focuses, reflecting different market needs and regulatory objectives.
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Prospects of cryptocurrency OTC trading
As mentioned above, Hong Kong, Singapore and the United States, as global financial centers, have their own characteristics in the regulation of cryptocurrencies and their OTC transactions. Below we analyze in detail the prospects and friendliness of these three regions in terms of OTC transactions.
Hongkong
Hong Kong has shown its commitment to the over-the-counter (OTC) trading of cryptocurrencies through its proactive regulatory approach to this sector through the Securities and Futures Commission (SFC). Hong Kong has demonstrated its commitment to investor protection and regulatory clarity through the introduction of a licensing regime under the Anti-Money Laundering and Countering the Financing of Terrorism Ordinance (AMLO). The implementation of this regime is intended to ensure that market participants operate in a regulated environment. However, the strict compliance requirements and the transition from a non-compliance period may initially pose challenges to market participants, requiring them to adapt to the new regulatory environment. This process, while complex, will help build a more stable and credible market in the long run.
Hong Kong is working to position itself as a regulated hub for crypto activities, a move that could attract institutional investors seeking compliant platforms. By providing a regulated and transparent market environment, Hong Kong is expected to become a major hub for cryptocurrency trading in the Asian region, attracting more international and local investors.
Singapore
Singapore's regulatory framework under the Payment Services Act (PSA) is evolving to strengthen protections and impose stricter regulations on digital payment token (DPT) service providers involved in over-the-counter transactions. The Monetary Authority of Singapore (MAS)'s strict approach to licensing and compliance, as well as its recent emphasis on custody responsibilities, demonstrates Singapore's cautious yet supportive stance towards the crypto market. These measures not only enhance market transparency and security, but also strengthen investor confidence.
Singapore combines strict regulatory oversight with efforts to promote innovation, making it attractive to companies that want to operate in compliance in a safe regulatory environment. By balancing regulatory strictness and supporting innovation, Singapore provides a favorable environment for cryptocurrency companies to develop, making it a leader in fintech innovation in the Asia-Pacific region.
USA
The cryptocurrency OTC trading environment in the United States is complex, and cryptocurrency market participants face strict regulatory requirements due to dual supervision by the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), as well as anti-money laundering and know-your-customer compliance obligations by the Financial Crimes Enforcement Network (FinCEN). Although some regulatory clarity has been achieved in securities and commodity trading in recent years, strict requirements and occasional regulatory uncertainty may still pose challenges to new market entrants.
Despite the challenges, the U.S. market remains attractive for its deep liquidity and market maturity. Once the compliance hurdles are overcome, these characteristics may attract larger institutional players. The U.S. financial market sophistication and innovation capabilities have enabled it to maintain an important position in the global cryptocurrency market, attracting companies that want to operate in a large and mature market.
Overall, Singapore is expected to attract a wider range of cryptocurrency OTC trading activities with its clear regulatory framework, strong investor protection measures and supportive stance towards financial technology innovation. Hong Kong and the United States are also actively promoting their respective regulatory and market development strategies. Although each has its own challenges, they also provide different opportunities and environments for cryptocurrency market participants. By understanding and adapting to the regulatory characteristics of these regions, market participants can better plan their global layout strategies.
Summarize
As the global acceptance of cryptocurrencies continues to increase, Hong Kong, Singapore and the United States, as global financial centers, have shown different strategies and advantages in the regulation of cryptocurrencies and their OTC transactions. Market participants should choose the most suitable region for layout and development according to their own needs and goals. In the evolving global cryptocurrency market, it is crucial to understand and adapt to the regulatory dynamics of various places in order to seize opportunities and achieve sustainable development.