Participants in the crypto market should select the most suitable jurisdictions for their layout and development based on their own needs and objectives.
As of the latest data, cryptocurrency trading volume on centralized exchanges (CEXs) reached USD 4.29 trillion in the first quarter of 2024, representing a significant increase compared to previous quarters. In contrast, the over-the-counter (OTC) market primarily serves institutional and high-net-worth individual investors. Despite significant activity, OTC trading volumes typically do not reach CEX levels due to the more private and customized nature of such transactions. Specific OTC trading volume data is harder to ascertain due to the lack of centralized reporting; however, the OTC market continues to expand alongside overall growth in the cryptocurrency market.
OTC Trading vs. Exchange Trading
In the realm of cryptocurrency trading, OTC trading and exchange trading each possess distinct characteristics, catering to different types of trading needs and user groups. Significant differences exist between the two in terms of liquidity, privacy, price slippage, flexibility, counterparty risk, security, regulation, ease of use, and typical users.
1. OTC Trading
OTC trading (over-the-counter trading) refers to transactions conducted directly between parties without going through a centralized exchange, typically facilitated by intermediaries or OTC desks. The primary advantage of this method is its ability to handle larger-scale transactions with minimal impact on market prices, while offering greater privacy and anonymity since transactions are not publicly recorded. Furthermore, by agreeing on prices in advance, OTC trading minimizes price slippage for large trades and provides flexible trading solutions, including customized trade sizes and specific settlement terms.
However, OTC trading also presents certain challenges. Since transactions do not occur on an exchange, participants face higher risks of counterparty default, with security relying on the reputation and reliability of the OTC intermediary or desk. Generally, OTC trading is subject to less regulation, offering more freedom but less protection. Additionally, finding reliable OTC intermediaries can be difficult, and the trading process may be less user-friendly. Consequently, OTC trading is typically suited for institutional investors or high-net-worth individuals seeking to transfer large amounts of cryptocurrencies.
2. Exchange Trading
In contrast, exchange trading occurs on centralized platforms where buy and sell orders are matched via an order book. This method offers high liquidity for various cryptocurrencies, suitable for trades of different sizes. Exchange trading is transparent and publicly recorded, allowing for market visibility. Although price slippage is possible, particularly for large trades that need to be executed across multiple price levels, the standardized environment of exchange trading features fixed rules and procedures that ensure regulatory compliance. Due to the safeguards provided by centralized platforms, counterparty risk in exchange trading is lower. Security measures adopted by exchanges provide users with a higher level of security, although exchanges may remain targets for hackers. Exchange trading is generally regulated, providing additional protection albeit with potential trading restrictions. Its user-friendly interfaces and additional features, such as market analysis tools and trading bots, enhance ease of use.
Nevertheless, exchange trading faces certain challenges. For instance, platforms may be subject to regulatory restrictions, preventing access for users in certain regions. Moreover, because exchanges must adhere to strict Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations, user trading privacy may be affected. For some traders, the fee structure of exchanges is also a consideration, as it may increase transaction costs. Overall, exchange trading is more suitable for retail investors and traders of various scales who seek a convenient and standardized trading environment.
In summary, both OTC trading and exchange trading have their respective advantages and disadvantages. The choice between the two depends primarily on the trader's specific needs and preferences. For users who need to handle large-volume transactions and value privacy and flexibility, OTC trading is an ideal choice. For traders who wish to enjoy high liquidity, security, and user-friendly interfaces, exchange trading is more appropriate. By understanding the differences between these two trading methods, traders can make more informed choices based on their circumstances to achieve optimal trading results.
The following provides a visual comparison via images.
Comparison of Regulatory Frameworks for Cryptocurrency OTC Trading
Regarding cryptocurrency regulation, Hong Kong, Singapore, and the United States each have distinct regulatory environments and characteristics. The following outlines the regulatory frameworks for cryptocurrencies in these three jurisdictions.
Hong Kong
Cryptocurrency regulation in Hong Kong is overseen by the Securities and Futures Commission (SFC), with key legislation including the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO). In Hong Kong, Virtual Asset Trading Platforms (VATPs) are subject to mandatory licensing and a transitional licensing regime, along with stringent compliance requirements. Regarding anti-money laundering, Hong Kong requires adherence to AML regulations stipulated under the AMLO, emphasizing customer asset protection and KYC processes. The SFC regulates OTC activities, requiring VATPs to comply with strict regulatory standards to protect clients. In recent developments, Hong Kong has strengthened regulation under the AMLO, focusing on compliance and investor protection, including intercepting funds from illicit sources. Facing future challenges, Hong Kong needs to balance market development with investor protection, ensuring the regulatory environment adap to the constantly evolving market.
Currently, cryptocurrency exchange shops in Hong Kong are very active, with many establishments offering over-the-counter (OTC) services. These transactions often involve large sums, allowing customers to buy and sell virtual assets using cash or other forms within the shop. At present, virtually anyone can open an OTC virtual asset shop in Hong Kong, which represents a certain loophole in the current virtual asset regulatory framework in Hong Kong.
On February 8, 2024, the Financial Services and the Treasury Bureau (FSTB) of Hong Kong launched a public consultation aimed at establishing a licensing regime for over-the-counter virtual asset trading services. Under the proposal, OTC operators would need to apply for a two-year license from Hong Kong Customs. Upon obtaining the license, personnel engaged in virtual asset trading would only be permitted to exchange virtual assets available on at least one Hong Kong-approved trading platform. The FSTB plans to submit bills concerning the OTC virtual asset licensing regime to the Legislative Council as soon as possible.
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Key requirements for operators of OTC virtual asset businesses under the proposal include: -
If operating a physical OTC virtual asset business: having premises in Hong Kong suitable for operation; -
If operating an online OTC virtual asset business: having a management office, correspondence address, and location for storing books and records in Hong Kong; -
Employing at least one qualified compliance officer; -
Employing at least one qualified anti-money laundering reporting officer; -
Having an appropriate corporate structure and operating the business with experienced and knowledgeable personnel; -
Conducting business honestly, fairly, and diligently; -
Implementing appropriate risk management measures, including policies and procedures regarding AML/CFT; -
Maintaining records of transactions and fund flows, and providing a complete list of wallets used for business purposes.
Under the proposal, OTC virtual asset businesses licensed by Hong Kong Customs would not be permitted to conduct conversions between virtual assets, but would be allowed to provide conversion services between virtual assets and fiat currency. If a business needs to conduct conversions between fiat currencies, it must also obtain a Money Service Operator license in Hong Kong.
These proposals also provide protective measures for retail investors. OTC virtual asset businesses would not be allowed to offer virtual assets that retail investors cannot buy or sell on SFC-licensed VATPs, nor would they be allowed to offer virtual assets issued by stablecoin issuers not licensed by the Hong Kong Monetary Authority (HKMA). These restrictions would not apply to persons qualifying as professional investors in Hong Kong.
Upon the effectiveness of the proposal, existing OTC virtual asset businesses would need to act within a six-month transition period. During this period, they may continue operations only if they submitted a license application within the first three months of the transition period.
Singapore
Cryptocurrency regulation in Singapore is overseen by the Monetary Authority of Singapore (MAS), primarily governed by the Payment Services Act (PSA). Any platform facilitating OTC trading of crypto assets may be deemed to be providing cryptocurrency services and thus subject to regulation under the PSA. For example, the following cryptocurrency-related services are currently regulated as cryptocurrency service providers under the PSA:
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Buying or selling cryptocurrencies;
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Establishing or operating a cryptocurrency exchange;
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Participating in and providing financial services related to the offering and/or sale of cryptocurrencies by issuers;
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Transferring or transmitting cryptocurrencies from one cryptocurrency address;
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Inducing (or attempting to induce) any person to buy or sell cryptocurrencies (without the cryptocurrency service provider actually accessing any funds or Digital Payment Tokens (DPT)).
If a company provides cryptocurrency services in Singapore, it will need to obtain one of two main types of licenses: (i) Standard Payment Institution license or (ii) Major Payment Institution license. For a Standard Payment Institution license, the specified threshold refers to monthly average cryptocurrency transactions accepted, processed, or executed up to SGD 3 million within a calendar year. In contrast, if a company intends to provide cryptocurrency services without limits on transaction volume or funds, it should apply for a Major Payment Institution license. This means that if a company's monthly average total value of all transactions through its cryptocurrency services exceeds the SGD 3 million threshold within a calendar year, a Major Payment Institution license is required. Considering that the PSA aims to safeguard payment service transactions, the process of applying for a license to provide cryptocurrency services can be lengthy and cumbersome.
Regarding anti-money laundering, the PSA requires compliance with AML/CFT procedures, strict customer due diligence, and transaction monitoring. MAS regulates over-the-counter trading under the PSA, ensuring that market makers and OTC trading platforms meet specific requirements. In recent developments, MAS has introduced stricter regulations for DPT service providers, emphasizing compliance within its jurisdiction. In the future, Singapore will seek regulatory clarity to address risks associated with cryptocurrencies while promoting innovation.
United States
Cryptocurrency regulation in the United States is overseen 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 the Comptroller of the Currency (OCC).
Under the supervision of these agencies, cryptocurrency trading platforms and OTC dealers must comply with strict regulations and requirements.
First, cryptocurrency trading platforms must register as Money Services Businesses (MSBs) with FinCEN and implement comprehensive anti-money laundering and Know Your Customer measures, including customer identity verification, transaction monitoring, and Suspicious Activity Reporting (SAR). These measures aim to prevent money laundering and terrorist financing and ensure that trading platforms comply with regulatory standards.
Second, the SEC regulates cryptocurrency transactions involving securities. If a certain cryptocurrency is deemed a security, the trading platform must comply with SEC securities regulations, including registration and disclosure requirements. Meanwhile, the CFTC regulates transactions treating 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 continuously issued guidance documents and enforced relevant regulations to strengthen oversight of the cryptocurrency market. These measures focus not only on investor protection and market integrity but also strive to establish a clear regulatory framework in the rapidly evolving digital asset sector.
Regarding recent regulatory developments for virtual assets in the United States, California's Digital Financial Assets Law (DFAL) will officially take effect on July 1, 2025. The 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), although there are certain exceptions, similar to New York's BitLicense. To obtain a BitLicense, a comprehensive application must be submitted to the New York State Department of Financial Services, a process that includes providing detailed information on business operations, compliance policies, AML/KYC procedures, cybersecurity measures, and financial status.
Once California's DFAL takes effect, it will require OTC cryptocurrency dealers operating in California to be licensed, as well other companies whose business involves the following categories:
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Exchanging or issuing digital financial assets:Exchanging, transferring, or storing digital financial assets, or issuing convertible digital financial assets.
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Holding electronic precious metals:Holding electronic precious metals or digital certificates indicating shares in precious metals on behalf of others, or issuing shares or digital certificates representing interests in precious metals.
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Exchanging game currency/tokens:Exchanging game currency or tokens, either to obtain digital financial assets from game or application publishers, or to obtain real-world currency.
With the DFAL, California will become the third state, after New York and Louisiana, to establish a licensing regime specifically for crypto assets.
In the future, challenges facing the United States include further enhancing regulatory transparency, effectively addressing market manipulation and fraud, and promoting technological innovation and market development while protecting investor interests. This requires regulatory bodies to continuously refine regulatory policies while remaining sensitive to market changes, ensuring the United States' competitiveness and leadership in the global cryptocurrency market.
Overall, the similarities and differences in cryptocurrency regulation among Hong Kong, Singapore, and the United States are reflected in regulatory bodies, legal frameworks, licensing requirements, anti-money laundering requirements, OTC trading regulation, recent developments, and challenges and future directions. The regulatory environments and policies in each region have different focuses, reflecting varying market demands and regulatory objectives.
The following provides a visual comparison via images.
Outlook for Cryptocurrency OTC Trading
As previously mentioned, Hong Kong, Singapore, and the United States, as global financial centers, each have distinct characteristics in regulating cryptocurrencies and their OTC trading. Below, we analyze in detail the prospects and friendliness of these three regions regarding OTC trading.
Hong Kong
Hong Kong has adopted a proactive regulatory stance towards cryptocurrency over-the-counter (OTC) trading through the Securities and Futures Commission (SFC), demonstrating high regard for this sector. Through the licensing regime introduced under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO), Hong Kong has demonstrated its commitment to investor protection and regulatory clarity. The implementation of this regime aims to ensure that market participants operate within a regulated environment. However, stringent compliance requirements and the transition from a non-compliant period may initially pose challenges for market participants, requiring them to adapt to the new regulatory environment. Although this process is complex, it will help establish a more stable and credible market in the long run.
Hong Kong is striving to position itself as a regulated hub for crypto activities, an initiative that may 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 continuously evolving, aiming to strengthen protective measures and impose stricter regulation on Digital Payment Token (DPT) service providers involved in OTC trading. The Monetary Authority of Singapore's (MAS) strict attitude towards licensing and compliance, along with its recent emphasis on custodial responsibilities, demonstrates Singapore's cautious yet supportive stance on the crypto market. These measures not only enhance market transparency and security but also bolster investor confidence.
Singapore combines strict regulatory oversight with efforts to promote innovation, making it highly attractive to companies wishing to operate compliantly within a secure regulatory environment. By balancing regulatory strictness with support for innovation, Singapore provides a favorable development environment for cryptocurrency enterprises, positioning itself as a leader in fintech innovation in the Asia-Pacific region.
United States
The environment for cryptocurrency over-the-counter trading in the United States is complex. Due to dual regulation 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 enforced by the Financial Crimes Enforcement Network (FinCEN), cryptocurrency market participants face strict regulatory requirements. Although some regulatory clarity has been achieved in recent years regarding securities and commodity trading, stringent requirements and occasional regulatory uncertainty may still pose challenges for new market entrants.
Despite facing numerous challenges, the US market remains attractive due to its deep liquidity and market maturity. Once compliance hurdles are overcome, these characteristics may attract larger institutional participants. The sophistication of US financial markets and its innovative capabilities keep it in an important position in the global cryptocurrency market, attracting enterprises hoping to operate in a large-scale and mature market.
Overall, Singapore, with its clear regulatory framework, strong investor protection measures, and supportive stance on fintech innovation, is poised to attract a broader range of cryptocurrency OTC trading activities. Hong Kong and the United States are also actively advancing their respective regulatory and market development strategies. Although each faces challenges, they also offer 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.
Conclusion
As global acceptance of cryptocurrencies continues to rise, Hong Kong, Singapore, and the United States, as global financial centers, demonstrate different strategies and advantages in regulating cryptocurrencies and their OTC trading. Market participants should select the most suitable jurisdictions for their layout and development based on their own needs and objectives. In the constantly evolving global cryptocurrency market, understanding and adapting to regulatory dynamics in various regions is crucial to seizing opportunities and achieving sustainable development.
Special Declaration:
This article is an original work of Mankun Law Firm and represents only the personal views of the author. It does not constitute legal consultation or legal advice on specific matters.
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