The over-the-counter (OTC) market has become a cornerstone of the global virtual asset ecosystem, serving high-net-worth individuals, institutional investors, and cryptocurrency exchanges. By facilitating large-volume trades off public order books, OTC desks ensure price stability, enhanced privacy, and seamless liquidity provisioning. In 2024 alone, OTC trading volume surged by 106%, with stablecoins accounting for approximately 95% of total activity—a figure that grew 147% year-on-year. Regionally, Europe leads institutional OTC demand at 38.5%, followed by North America, Asia, and the Middle East.
As this sector expands, so too does regulatory scrutiny. OTC providers now face increasing compliance obligations across major jurisdictions—particularly in Hong Kong, the European Union, and the United States. While all three regions emphasize anti-money laundering (AML) and know-your-customer (KYC) standards, their approaches to licensing, enforcement, and cross-border operations vary significantly.
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The Evolving Compliance Landscape for OTC Providers
OTC businesses operate in a complex regulatory environment shaped by fragmented international frameworks. Unlike traditional exchanges, OTC desks often execute private transactions without real-time price disclosures, raising concerns about market manipulation and information asymmetry. These risks are amplified in cross-border dealings, where conflicting data privacy laws and divergent AML requirements increase operational complexity.
To mitigate these challenges, obtaining formal regulatory recognition—through licensing—is becoming essential. A compliant license not only legitimizes an OTC business but also enhances trust among institutional clients and regulators alike.
Let’s examine how Hong Kong, the EU, and the U.S. approach OTC regulation today.
Hong Kong: Building a Formal OTC Licensing Framework
In February 2024, Hong Kong’s Financial Services and Treasury Bureau (FSTB) released a consultation paper proposing to regulate virtual asset OTC services under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO). This marks a pivotal step toward formalizing oversight of OTC desks operating in or targeting the Hong Kong market.
Under the proposed framework, all entities offering virtual asset OTC services must apply for authorization from the Customs and Excise Department (C&ED), aligning them with existing Virtual Asset Service Provider (VASP) regulations. As of April 2025, the legislation remains under consultation, with final implementation timelines pending government announcement.
Key compliance requirements include:
Anti-Money Laundering (AML) and Know-Your-Customer (KYC)
OTC operators must implement risk-based customer due diligence (CDD), especially for high-value transactions. This includes verifying client identities, monitoring transaction patterns, and reporting suspicious activities to authorities.
Compliance Documentation
Firms are required to submit comprehensive documentation outlining their AML/CFT policies, KYC procedures, and internal risk management protocols. These documents serve as proof of adherence to regulatory expectations.
Ongoing Supervision
The C&ED will conduct regular audits and compliance reviews, focusing on transaction transparency and adherence to AML obligations. Special attention will be paid to large trades that could influence market dynamics.
This emerging regime positions Hong Kong as a jurisdiction moving toward robust, principles-based oversight of private crypto transactions.
European Union: Unified Oversight Under MiCA
The EU’s Markets in Crypto-Assets Regulation (MiCA) establishes a harmonized legal framework for crypto service providers across the European Economic Area (EEA). While MiCA does not define a separate “OTC dealer” category, firms engaging in order execution, trading, or custody of crypto assets fall under the Crypto-Asset Service Provider (CASP) umbrella.
Once licensed in one EU member state, a CASP can passport its services across the EEA—offering significant operational advantages for pan-European OTC platforms.
Core compliance pillars under MiCA include:
AML/KYC Compliance
OTC providers must enforce strict identity verification and ongoing monitoring processes. Suspicious transactions must be reported promptly, and enhanced due diligence applies to high-risk clients or large transfers.
Risk Management and Capital Requirements
Firms must demonstrate sufficient financial resilience and maintain robust internal controls. This includes systems to prevent market abuse, manage price volatility, and safeguard client assets.
Market Transparency and Investor Protection
Even though OTC trades are private, MiCA mandates transparency in pricing practices and full disclosure of risks associated with crypto assets. Providers must avoid conflicts of interest and ensure fair treatment of clients.
Cross-Border Applicability
Notably, MiCA applies extraterritorially—meaning non-EU OTC providers serving EU clients must comply with its rules. This creates a high compliance bar for global operators, particularly regarding GDPR-aligned data handling and consumer rights protections.
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United States: Fragmented Regulation Across Federal and State Levels
Unlike Hong Kong and the EU, the U.S. lacks a unified federal licensing regime specifically for OTC crypto dealers. Instead, regulation is fragmented across multiple agencies and state-specific frameworks.
Key regulatory bodies include:
- Securities and Exchange Commission (SEC): Applies if the traded digital asset qualifies as a security under the Howey Test. In such cases, OTC desks may need to register as broker-dealers.
- Commodity Futures Trading Commission (CFTC): Regulates derivatives tied to crypto commodities like Bitcoin. Firms involved in futures or swaps may fall under CFTC jurisdiction.
- Financial Crimes Enforcement Network (FinCEN): Requires registration as a Money Services Business (MSB) if the OTC desk functions as a money transmitter. This triggers mandatory AML/KYC programs and suspicious activity reporting.
At the state level, New York’s BitLicense regime stands out as one of the most stringent. Any company conducting virtual currency activities—including OTC trading—in or with New York residents must obtain a BitLicense. Requirements include:
- Comprehensive AML/KYC procedures
- Minimum capital reserves
- Regular financial and compliance reporting
For multi-state operators, navigating this patchwork of federal and local rules significantly increases compliance costs and legal exposure.
Strategic Compliance Recommendations for Global OTC Desks
Given these divergent regulatory landscapes, successful OTC providers adopt proactive strategies to manage risk and ensure scalability.
Build Regional Compliance Teams
Establish dedicated legal and compliance teams in key markets—especially in the U.S., where state-level variations demand localized expertise.
Implement a Global AML/KYC Framework
Develop a standardized core policy for customer verification and transaction monitoring, then adapt it regionally to meet specific regulatory demands.
Strengthen Customer Due Diligence (CDD)
Conduct thorough background checks on institutional clients and high-net-worth individuals. Enhanced due diligence reduces exposure to illicit finance risks.
Deploy Advanced Transaction Monitoring Tools
Use AI-driven surveillance systems to detect anomalies indicative of market manipulation or wash trading—critical in opaque OTC environments.
Conduct Regular Compliance Training and Audits
Educate staff on evolving regulations across jurisdictions. Perform periodic internal audits to assess policy effectiveness and readiness for regulatory inspections.
Frequently Asked Questions (FAQ)
Q: Do OTC crypto traders need a license in Hong Kong?
A: Not yet—but they will soon. Hong Kong is finalizing a licensing regime under AMLO that will require all OTC service providers to obtain approval from the Customs and Excise Department.
Q: Can a U.S.-based OTC desk serve EU clients under MiCA?
A: Yes, but only if it complies with MiCA’s requirements for Crypto-Asset Service Providers (CASP), including AML/KYC, capital adequacy, and consumer protection—even if based outside the EU.
Q: Are stablecoin trades regulated differently in these regions?
A: Yes. Due to their scale and systemic importance, stablecoin transactions face heightened scrutiny—especially under MiCA and proposed Hong Kong rules—where issuers and traders must prove redemption mechanisms and reserve transparency.
Q: What happens if an OTC desk fails AML checks in the U.S.?
A: Penalties can include heavy fines, revocation of state licenses (e.g., BitLicense), criminal charges, or designation as an unlicensed money transmitter under FinCEN rules.
Q: Is cross-border data sharing allowed under EU regulations?
A: Only with adequate safeguards. Under GDPR, transferring customer data outside the EEA requires compliance with strict privacy standards—posing challenges for globally operated OTC platforms.
Q: How do OTC desks prove price fairness without public markets?
A: By referencing benchmark indices, multi-source pricing feeds, and audit trails that demonstrate arms-length valuation—increasingly required under MiCA and expected in future Hong Kong rules.
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