Author of this article: Iris, Shao Jiadian
OTC merchants, as core participants in the virtual asset market, focus on providing large trading platforms for high-net-worth clients, institutional investors, and exchanges. Through customized trading mechanisms, OTC merchants can ensure that large-scale transactions are completed smoothly without interfering with market prices, offering clients higher privacy, trading security, and liquidity assurance.
Relevant data shows that in 2024, the OTC trading volume increased by 106% year-on-year, reflecting a significant rise in market activity and industry demand for OTC services. Among this, stablecoins dominate—accounting for approximately 95% of trading volume, with an annual trading volume growth of 147%. Additionally, from a market distribution perspective, Europe dominates institutional OTC trading with a demand share of 38.5%, followed by North America, Asia, and the Middle East, each accounting for 15.4%.
However, with market expansion, OTC merchants also face a series of compliance challenges.
OTC Merchant Compliance Challenges
The regulatory framework for the cryptocurrency industry is relatively loose compared to traditional financial markets, which creates compliance uncertainties for OTC merchants in different regions globally. While the global regulatory environment is gradually tightening, especially in areas like anti-money laundering (AML) and customer identity verification (KYC), OTC merchants still need to navigate changing legal and regulatory requirements.
At the same time, the business model of OTC merchants requires them to handle large transactions, which often do not disclose market prices, increasing the risks of market manipulation and information asymmetry. In the absence of transparent pricing, OTC merchants need to take additional measures to ensure the fairness and price stability of transactions to prevent artificial influence on the market.
Additionally, OTC merchants often participate in cross-border transactions, thereby facing regulatory requirements from different jurisdictions. The differences in regulatory standards across regions necessitate that OTC merchants continuously adjust their compliance strategies when conducting international business to ensure compliance with legal regulations in different markets. Particularly in data protection and privacy policies, the complexity of cross-border compliance significantly increases the compliance risks for OTC merchants.
In this context, the OTC merchant license becomes particularly crucial.
By obtaining legitimate licenses, OTC merchants can ensure compliance with legal requirements in various regions and enhance their credibility and competitiveness in an increasingly strict market environment.
OTC Merchant License Status
However, the regulatory frameworks for OTC merchants are not yet fully unified across different countries and regions. Nevertheless, countries and regions where OTC operations mainly take place, such as Hong Kong, the EU, and the United States, have gradually developed relevant legislation and licensing matters.
Next, Mankun Law Firm will systematically outline the legislative status of these regions and explore their licensing requirements for OTC merchants, along with their respective compliance requirements.
1. Hong Kong: OTC Merchant Regulatory Legislation
The Hong Kong Financial Services and the Treasury Bureau (FSTB) published a legislative consultation document on virtual asset over-the-counter (OTC) services in February 2024, proposing the introduction of an OTC merchant licensing system through the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO). This legislative framework is expected to be implemented soon.
According to the proposal, Hong Kong plans to introduce an OTC merchant licensing system through the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO) to ensure that these companies comply with anti-money laundering (AML) and customer identity verification (KYC) compliance requirements. All companies providing virtual asset OTC trading services, including OTC merchants, must apply for relevant licenses from the Hong Kong Customs and Excise Department (CCE) and strictly adhere to these legal regulations. As of April 2025, this legislation is still in the consultation phase, with specific implementation details and effective dates pending final government announcement.
This framework requires OTC merchants to meet the following core compliance requirements:
Anti-Money Laundering (AML) and Customer Identity Verification (KYC)
Licensing requirements for OTC merchants to implement strict anti-money laundering and customer identity verification policies to ensure that their trading activities are not used for illegal fund flows, money laundering, or financing terrorism. OTC merchants must execute risk-based Customer Due Diligence (CDD) procedures, especially when handling large transactions, conducting identity verification and transaction monitoring. Each transaction requires customer identity verification, and any suspicious activities must be reported.
Compliance Document Requirements
OTC merchants must submit detailed compliance documents to regulatory authorities, including their anti-money laundering policies, customer identity verification procedures, risk management measures, etc. These documents will be used to demonstrate that OTC merchants have taken necessary measures to comply with relevant anti-money laundering and customer protection regulations.
Ongoing Regulation and Compliance Supervision
Hong Kong Customs will be responsible for the ongoing supervision of OTC merchants to ensure compliance with all relevant anti-money laundering regulations and regularly review their compliance. Particularly in large transactions and market transparency, Hong Kong Customs will strengthen compliance oversight of OTC merchants to ensure the legality and transparency of their trading activities.
2. EU: MiCA Legislation
The EU's MiCA legislation provides a unified regulatory framework that covers cryptocurrency service providers (CSPs), including over-the-counter (OTC) merchants. Although MiCA does not establish a separate category for 'OTC merchants,' if they engage in types of cryptocurrency services defined under MiCA (such as order execution, trade matching, or asset custody), they must register as CSPs. Under this legislation, OTC merchants operating within the EU only need to obtain a cryptocurrency service provider (CSP) license in one member state to operate freely throughout the European Economic Area (EEA).
At the same time, OTC merchants also need to comply with higher compliance requirements set by the legislation, especially in the following core areas:
Anti-Money Laundering (AML) and Customer Identity Verification (KYC)
MiCA requires OTC merchants 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 terrorism. OTC merchants must execute risk-based Customer Due Diligence (CDD) procedures, especially during large transactions, conducting strict identity verification and transaction monitoring. Specifically, for each transaction, OTC merchants need to identify and verify customer identities and report any suspicious activities.
Compliance Document Requirements
OTC merchants are required to submit compliance documents to regulatory authorities, including anti-money laundering policies, risk management measures, and capital requirements, to demonstrate that they have taken steps to comply with MiCA requirements. In addition to AML/KYC policies, MiCA also requires OTC merchants to establish an effective risk management framework to prevent market manipulation, price volatility, and systemic risks, ensuring transparency and stability in their operations.
Issuance, Trading, and Custody of Virtual Assets
MiCA not only involves compliance requirements for OTC merchant transactions but also extends to the issuance and custody services of cryptocurrency assets. Issuers of cryptocurrency assets, trading platforms, and OTC merchants must comply with market transparency requirements, provide adequate risk disclosures, and avoid harming investors. OTC merchants must ensure the transparency of their trading activities to prevent opaque trading behaviors from affecting market prices and asset stability.
Cross-Border Compliance Requirements
MiCA emphasizes cross-border compliance, meaning that even if OTC merchants operate outside the EU, they still need to comply with MiCA regulations. This requires OTC merchants to adopt consistent compliance measures for cross-border transactions, especially in anti-money laundering and consumer protection. Given that different legal requirements may exist between the EU and other regions, OTC merchants need to deal with compliance coordination issues across jurisdictions, particularly regarding data privacy and legal conflicts, such as the strict requirements for data protection under the EU's GDPR.
3. United States: Decentralized Regulatory Status
In the United States, there is currently no unified regulatory framework specifically for OTC merchants. Therefore, the regulation of OTC merchants primarily depends on whether the virtual assets are defined as securities and the type of business involved.
Regulatory bodies in the United States, such as the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), and the Financial Crimes Enforcement Network (FinCEN), are responsible for part of the regulatory oversight of OTC merchants, with specific requirements depending on the type of operations and the nature of virtual assets involved.
SEC Regulation: If the virtual assets traded by OTC merchants are deemed 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 a virtual asset constitutes a security. If a virtual asset is defined as a security, OTC merchants must comply with securities laws and may need to register as securities broker-dealers, subject to corresponding regulatory requirements. Assets that do not meet the definition of securities are not regulated by the SEC.
Financial Crimes Enforcement Network (FinCEN): If an OTC merchant is deemed to be engaged in money services business, it must also register with the Financial Crimes Enforcement Network (FinCEN) and comply with anti-money laundering (AML) and counter-terrorist financing (CFT) regulations. OTC merchants must fulfill suspicious transaction reporting obligations and implement Customer Due Diligence (CDD) procedures to ensure that their business complies with U.S. financial crime prevention requirements.
CFTC Regulation: For OTC merchants involved in virtual asset futures and derivatives, the Commodity Futures Trading Commission (CFTC) may intervene in regulation. The CFTC views certain virtual assets (like Bitcoin) as commodities, hence relevant futures contracts and derivatives trading will be regulated by it.
However, at the state level, New York's BitLicense system provides a specialized regulatory framework for OTC merchants. Under the BitLicense system, any company providing virtual currency-related services in New York State, including OTC merchants, must obtain a BitLicense. The core content of this licensing system includes:
Anti-Money Laundering (AML) and Customer Identity Verification (KYC) requirements ensure that OTC merchants strictly comply with financial crime prevention regulations.
Capital adequacy requirements ensure that OTC merchants maintain necessary financial stability during operations.
Reporting and Compliance: OTC merchants are required to regularly submit operational and financial reports to regulatory authorities to ensure that their activities comply with regulations.
Therefore, when operating in New York State, OTC merchants must meet all compliance requirements of the BitLicense. This also means that for OTC merchants operating across state lines, in addition to federal-level regulations, they must also consider potential different regulatory requirements in each state.
Mankun Law Firm Compliance Recommendations
By comparing the regulatory systems of Hong Kong, the EU, and the United States, we can see significant differences in the OTC merchant licensing system across different regions. Therefore, OTC merchants need to pay special attention to these differences and make corresponding adjustments when operating globally:
Hong Kong: The licensing system is still being developed, expected to be similar to the VASP license, focusing on anti-money laundering and KYC, as well as ensuring the transparency and legality of fund flows in large transactions.
EU: The MiCA legislation focuses on cross-border compliance and market transparency. Particularly in globalization operations, OTC merchants need to ensure compliance with the EU's stringent regulations regarding market transparency, investor protection, and consumer rights.
United States: Regulation is decentralized but focuses on localized management; differences in regulations across different states bring additional compliance costs for OTC merchants operating across state lines.
Therefore, given the differences in regulatory systems across regions, OTC merchants need to adopt flexible compliance strategies when operating globally to ensure they can adapt to legal requirements in different areas and effectively mitigate compliance risks. For example:
1. Establishing Cross-Regional Compliance Teams
OTC merchants should consider establishing dedicated compliance teams in key operating regions to deeply understand and track local regulatory changes. Particularly in the United States, where compliance requirements differ from state to state, establishing localized compliance teams can help OTC merchants address specific regional regulatory requirements and ensure compliance for interstate operations.
2. Establishing a Global Unified KYC/AML Compliance Policy
Although specific requirements differ across regions, OTC merchants can still develop a global unified anti-money laundering (AML) and customer identity verification (KYC) compliance framework as a basis for adjustment according to specific regulations in different areas.
3. Strengthening Customer Due Diligence (CDD) and Background Checks
Implementing strict Customer Due Diligence (CDD) procedures globally, especially in regions like the EU and the United States, ensures the legality and transparency of all customer information, along with necessary background checks. This not only complies with KYC requirements but also helps OTC merchants avoid potential risks from non-compliant clients.
4. Strengthen Trading Monitoring and Compliance Review
OTC merchants should utilize advanced trading monitoring systems to track and detect potential market manipulation and price manipulation behaviors in real time, especially in cases where the transparency of the cryptocurrency market is low. These systems can help OTC merchants ensure the fairness and transparency of large transactions and ensure compliance with local market manipulation response mechanisms.
5. Regular Cross-Border Compliance Training and Audits
With the changing global regulatory environment, OTC merchants should regularly conduct cross-border compliance training to ensure that employees are aware of the latest regulatory requirements and compliance procedures in different regions. At the same time, regular internal compliance audits should be conducted to assess the effectiveness of existing compliance measures, ensuring that operations comply with laws and regulations in various locations around the world.