As a core participant in the virtual asset market, OTC traders focus on providing large-scale trading platforms for high-net-worth clients, institutional investors and exchanges. Through customized trading mechanisms, OTC traders can ensure that large-scale transactions are completed smoothly without interfering with market prices, and provide customers with higher privacy, transaction security and liquidity guarantees.
Relevant data shows that in 2024, OTC trading volume increased by 106% year-on-year, reflecting a significant increase in market activity and industry demand for OTC. Among them, stablecoins dominate - about 95% of trading volume, and the annual trading volume increased by 147%. In addition, from the perspective of market distribution, Europe dominates institutional OTC transactions, with a demand share of 38.5%, followed by North America, Asia and the Middle East, each accounting for 15.4%.
However, as the market expands, OTC traders also face a series of compliance challenges.
Compliance Challenges for OTC Traders
The regulatory framework of the crypto industry is relatively loose compared to traditional financial markets, which makes OTC traders face compliance uncertainty in different regions around the world. Although the global regulatory environment is gradually tightening, especially in areas such as anti-money laundering (AML) and customer identity verification (KYC), OTC traders still need to deal with changing legal and regulatory requirements.
At the same time, the business model of OTC dealers requires them to handle large transactions, and these transactions are usually not disclosed in the market price, which increases the risk of market manipulation and information asymmetry. In the absence of transparent prices, OTC dealers need to take additional measures to ensure the fairness of transactions and price stability to avoid market influence.
In addition, OTC traders often participate in cross-border transactions and face regulatory requirements in different jurisdictions. The differences in regulatory standards in different regions require OTC traders to constantly adjust their compliance strategies when conducting international business to ensure that their business complies with legal regulations in different markets. Especially in terms of data protection and privacy policies, the complexity of cross-border compliance has greatly increased the compliance risks of OTC traders.
In this context, OTC merchant license becomes particularly critical.
By obtaining legal licenses, OTC traders can not only ensure that they comply with local legal requirements, but also enhance their credibility and market competitiveness in an increasingly stringent market environment.
Current Status of OTC Trader Licenses
However, looking at countries and regions around the world, the regulatory framework for OTC traders has not yet been fully unified. Despite this, countries and regions where OTCs mainly operate, such as Hong Kong, the European Union, and the United States, have also gradually formulated relevant legislation and licensing matters.
Next, Attorney Mankiw will review the legislative status of these regions one by one and explore their requirements for OTC merchant licenses and their respective compliance requirements.
1. Hong Kong: OTC Trader Regulatory Legislation
The Financial Services and Treasury Bureau (FSTB) of Hong Kong issued a legislative consultation document on over-the-counter (OTC) services for virtual assets in February 2024, proposing the introduction of an OTC license system through the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO). It is expected that this legislative framework will be introduced soon.
According to the proposal, Hong Kong plans to introduce a licensing system for OTC traders through the Anti-Money Laundering and Terrorist Financing Ordinance (AMLO) to ensure that these companies meet compliance requirements such as Anti-Money Laundering (AML) and Customer Identity Verification (KYC). All companies that provide virtual asset OTC trading services, including OTC traders, are required to apply for relevant licenses from the Hong Kong Customs and Excise Department (CCE) and strictly abide by these legal provisions. As of April 2025, the legislation is still in the consultation stage, and the specific implementation details and effective date are still subject to the final announcement of the government.
This framework requires OTC dealers to meet the following core compliance requirements:
Anti-Money Laundering (AML) and Know Your Customer (KYC)
The license requires OTC traders to implement strict anti-money laundering and customer identity verification policies to ensure that their trading activities are not used for illegal capital flows, money laundering or financing terrorist activities. OTC traders must perform risk-based customer due diligence (CDD) procedures, especially when dealing with large transactions, identity verification and transaction monitoring. Every transaction requires customer identification and reporting when suspicious activities are found.
Compliance Document Requirements
OTC traders are required to submit detailed compliance documents to regulators, including their anti-money laundering policies, customer identity verification procedures, risk management measures, etc. These documents will be used to prove that OTC traders have taken necessary measures to comply with relevant anti-money laundering and customer protection regulations.
Ongoing supervision and compliance monitoring
Hong Kong Customs will be responsible for the continuous supervision of OTC traders, ensuring that they comply with all relevant anti-money laundering regulations and regularly review their compliance. In particular, in terms of bulk transactions and market transparency, Hong Kong Customs will strengthen compliance supervision of OTC traders to ensure that their trading activities are legal and transparent.
2. EU: MiCA Act
The EU's MiCA Act provides a unified regulatory framework covering crypto asset service providers (CASPs), including over-the-counter (OTC) traders. Although MiCA does not set up a separate category of "OTC traders", if they engage in crypto service types defined by MiCA (such as order execution, transaction matching or asset custody), they must register as CASPs. According to the Act, OTC traders in the EU only need to obtain a crypto asset service provider (CASP) license in one member state to operate throughout the European Economic Area (EEA).
At the same time, OTC dealers also need to comply with the higher compliance requirements set by the Act, especially in the following core aspects:
Anti-Money Laundering (AML) and Know Your Customer (KYC)
MiCA requires OTC traders to implement strict anti-money laundering (AML) and customer identity verification (KYC) policies to ensure that their trading activities are not used for illegal fund flows, money laundering or financing terrorist activities. OTC traders must perform risk-based customer due diligence (CDD) procedures, especially in large transactions, and conduct strict identity verification and transaction monitoring. In particular, for each transaction, OTC traders need to identify and verify the identity of the customer and report any suspicious activities.
Compliance Document Requirements
OTC traders need to submit compliance documents including anti-money laundering policies, risk management measures, capital requirements, etc. to the regulator to prove that they have taken measures to meet the requirements of MiCA. In addition to AML/KYC policies, MiCA also requires OTC traders to establish an effective risk management framework to prevent market manipulation, price fluctuations and systemic risks, and ensure the transparency and stability of their operations.
Virtual asset issuance, trading and custody
MiCA not only involves the transaction compliance requirements of OTC traders, but also extends to the issuance and custody services of crypto assets. Issuers, trading platforms and OTC traders of crypto assets must comply with market transparency requirements and publish sufficient risk disclosures to avoid harm to investors. OTC traders need to ensure the transparency of their trading activities to prevent the impact of opaque trading behaviors on market prices and asset stability.
Cross-border compliance requirements
MiCA emphasizes cross-border compliance, which means that even if OTC traders operate outside the EU, they still need to comply with MiCA regulations. This requires OTC traders to take consistent compliance measures in cross-border transactions, especially in anti-money laundering and consumer protection. Since there may be different legal requirements in the EU and other regions, OTC traders need to deal with compliance coordination issues between different jurisdictions, especially in terms of data privacy and legal conflicts, such as the strict requirements of the EU's GDPR on data protection.
3. United States: Current situation of decentralized regulation
In the United States, there is currently no unified regulatory framework for OTC dealers (over-the-counter dealers). Therefore, the regulation of OTC dealers mainly depends on whether virtual assets are defined as securities and the type of business they involve.
U.S. regulatory agencies such as the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), and the Financial Crimes Enforcement Network (FinCEN) are responsible for some of the regulatory responsibilities for OTC traders. The specific requirements depend on the type of operation of the OTC trader and the nature of the virtual assets.
SEC regulation: If the virtual assets traded by OTC traders are considered securities, then their transactions will be regulated by the U.S. Securities and Exchange Commission (SEC). The SEC uses the Howey test to determine whether virtual assets constitute securities. If a virtual asset is defined as a security, OTC traders need to comply with securities laws and may need to register as securities brokers and be subject to corresponding regulatory requirements. Assets that do not meet the definition of securities are not subject to SEC regulation.
Financial Crimes Enforcement Network (FinCEN): If an OTC trader is identified as engaging in money service business, he or she must also register with the Financial Crimes Enforcement Network (FinCEN) and comply with anti-money laundering (AML) and counter-terrorist financing (CFT) regulations. OTC traders must fulfill suspicious transaction reporting obligations and implement customer due diligence (CDD) procedures to ensure that their business complies with the financial crime prevention and control requirements of the United States.
CFTC supervision: For OTC traders involved in virtual asset futures and derivatives, the Commodity Futures Trading Commission (CFTC) may intervene in supervision. The CFTC considers certain virtual assets (such as Bitcoin) as commodities, so related futures contracts and derivatives transactions are subject to its supervision.
However, at the state level, New York's BitLicense system provides a special regulatory framework for OTC dealers. According to the BitLicense system, any company that provides virtual currency-related services in New York State, including OTC dealers, must obtain a BitLicense license. The core content of this license system includes:
Anti-money laundering (AML) and know-your-customer (KYC) requirements ensure that OTC traders strictly comply with financial crime prevention and control regulations.
Capital adequacy requirements ensure that OTC traders maintain the necessary financial stability during their operations.
Reporting and compliance: OTC traders are required to submit operational and financial reports to regulators on a regular basis to ensure that their activities comply with regulations.
Therefore, when operating in New York State, OTC dealers must meet all the compliance requirements of the BitLicense. This also means that for OTC dealers operating across states, in addition to federal-level supervision, they must also consider the different regulatory requirements that may exist in each state.
Mankiw's Compliance Advice
By comparing the regulatory systems of Hong Kong, the EU and the US, we can see that there are significant differences in the OTC license systems in different regions. Therefore, OTC traders need to pay special attention to these differences and make corresponding adjustments when operating globally:
Hong Kong: The licensing system is still under development and is expected to be similar to the VASP license, focusing on anti-money laundering and KYC, as well as ensuring the transparency and legality of capital flows in large transactions.
EU: The MiCA Act focuses on cross-border compliance and market transparency. In particular, in global operations, OTC traders need to ensure compliance with the EU's strict regulations on market transparency, investor protection and consumer rights.
United States: Regulation is decentralized but focuses on local management. Differences in regulations between states bring additional compliance costs to OTC traders operating across states.
Therefore, given the differences in regulatory systems in different regions, OTC traders need to adopt flexible compliance strategies when operating globally to ensure that they can adapt to the legal requirements of different regions and effectively avoid compliance risks. For example:
1. Establish a cross-regional compliance team
OTC dealers should consider setting up dedicated compliance teams in major operating regions to understand and track local regulatory changes. Especially in the United States, since each state has different compliance requirements, setting up local compliance teams can help OTC dealers cope with regulatory requirements in specific regions and ensure compliance in cross-state operations.
2. Develop a globally unified KYC/AML compliance policy
Although specific requirements vary from region to region, OTC firms can still develop a globally unified anti-money laundering (AML) and customer identity verification (KYC) compliance framework and use it as a basis to adjust it according to the specific regulations of different regions.
3. Strengthen customer due diligence (CDD) and background checks
Implement strict customer due diligence (CDD) procedures around the world, especially in regions such as the EU and the US, to ensure the legitimacy and transparency of all customer information and conduct necessary background checks. This not only complies with KYC requirements, but also helps OTC traders avoid potential risks caused by non-compliant customers.
4. Strengthen transaction monitoring and compliance review
OTC dealers should use advanced transaction monitoring systems to track and detect potential market manipulation and price manipulation in real time, especially in the context of low transparency in the crypto market. These systems can help OTC dealers ensure fairness and transparency in block trades and ensure compliance with the response mechanisms for market manipulation in various regions.
5. Conduct regular cross-border compliance training and audits
As the global regulatory environment changes, OTC traders should conduct cross-border compliance training regularly to ensure that employees understand the latest regulatory requirements and compliance operation procedures in different regions. At the same time, they should conduct internal compliance audits regularly to evaluate the effectiveness of existing compliance measures and ensure that global operations comply with local laws and regulations.
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Authors: Iris, Shao Jiayi