A Comparative Analysis of the Current State and Outlook of Cryptocurrency OTC Trading Regulation in Hong Kong, Singapore, and the United States
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A Comparative Analysis of the Current State and Outlook of Cryptocurrency OTC Trading Regulation in Hong Kong, Singapore, and the United States
Crypto market participants should choose the most suitable region for their expansion and development based on their own needs and objectives.
Navigating Web3 tides with focused insightsAuthor: ManQin Blockchain Legal Services
As of the latest data, centralized exchange (CEX) cryptocurrency trading volume reached $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. Although OTC activity is substantial, due to its more private and customized nature, it typically does not reach the trading volumes seen on CEXs. The lack of centralized reporting makes specific OTC trading volume figures harder to determine, but the OTC market continues to expand alongside the overall growth of the cryptocurrency market.
OTC Trading vs Exchange Trading
In the realm of cryptocurrency trading, OTC and exchange trading each have distinct characteristics, catering to different types of trading needs and user groups. They differ significantly in terms of liquidity, privacy, price slippage, flexibility, counterparty risk, security, regulation, ease of use, and typical users.
1. OTC Trading
OTC trading refers to transactions conducted directly between two parties without going through a centralized exchange, typically facilitated by an intermediary or OTC desk. The primary advantage of OTC trading is its ability to handle larger transactions with minimal impact on market prices, while offering higher privacy and anonymity since trades are not publicly recorded. Additionally, by pre-negotiating prices, OTC trading minimizes price slippage for large orders and provides flexible solutions, including customized trade sizes and specific settlement terms.
However, OTC trading also presents certain challenges. Since trades occur off-exchange, participants face higher counterparty default risk, with security relying heavily on the reputation and reliability of the OTC intermediary or desk. OTC trading is generally less regulated, offering greater freedom but less protection, and requires finding a trustworthy OTC provider, which may make the process less user-friendly. As such, OTC trading is typically suited for institutional investors or high-net-worth individuals seeking to transfer large amounts of cryptocurrency.
2. Exchange Trading
In contrast, exchange trading takes place on centralized platforms where buy and sell orders are matched via an order book. This model offers high liquidity across various cryptocurrencies, making it suitable for trades of all sizes. Exchange trading is transparent and publicly recorded, enabling market visibility. While price slippage can occur—especially when large orders must be filled across multiple price levels—the standardized environment of exchanges, with fixed rules and procedures, ensures orderly trading. With centralized platforms providing safeguards, counterparty risk is lower, and security measures implemented by exchanges offer enhanced protection, although they remain potential targets for hackers. Exchange trading is typically regulated, offering additional investor protections but potentially imposing trading restrictions. User-friendly interfaces, along with added features such as market analytics tools and trading bots, enhance usability.
Nevertheless, exchange trading faces its own challenges. Platforms may be subject to regulatory constraints that limit access for users in certain regions. Moreover, strict KYC (Know Your Customer) and AML (Anti-Money Laundering) requirements imposed by exchanges can compromise user privacy. For some traders, fee structures on exchanges are another consideration, as they may increase overall trading costs. Overall, exchange trading is better suited for retail investors and traders of all sizes who seek convenience and a standardized trading environment.
In summary, both OTC and exchange trading have their advantages and disadvantages. The choice between them largely depends on the trader’s specific needs and preferences. For those needing to execute large-volume trades while prioritizing privacy and flexibility, OTC trading is an ideal option. For those who value high liquidity, security, and user-friendly interfaces, exchange trading is more appropriate. By understanding the differences between these two methods, traders can make more informed decisions to achieve optimal trading outcomes.
Below is a visual comparison.
Comparison of Cryptocurrency OTC Trading Regulatory Frameworks
In terms of cryptocurrency regulation, Hong Kong, Singapore, and the United States each have distinct regulations and regulatory environments. Below is an overview of the regulatory frameworks 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). Virtual asset trading platforms (VATPs) in Hong Kong are required to obtain mandatory licenses under a transitional licensing regime and must meet strict compliance standards. Regarding anti-money laundering, Hong Kong enforces AMLO-compliant AML regulations, emphasizing customer asset protection and KYC procedures. The SFC regulates OTC activities, requiring VATPs to adhere to rigorous standards to safeguard clients. Recent developments include strengthened oversight under AMLO, focusing on compliance and investor protection, including intercepting funds from illicit sources. Going forward, Hong Kong faces the challenge of balancing market development with investor protection while ensuring its regulatory framework adapts to evolving market dynamics.
Currently, cryptocurrency exchange shops in Hong Kong are highly active, with many offering over-the-counter (OTC) services involving large transaction amounts, allowing customers to buy and sell virtual assets in cash or other forms. At present, virtually anyone can open an OTC virtual asset shop in Hong Kong, revealing a gap in the existing virtual asset regulatory framework.
On February 8, 2024, Hong Kong’s Financial Services and the Treasury Bureau (FSTB) launched a public consultation aimed at establishing a licensing regime for OTC virtual asset trading services. Under the proposal, OTC operators would need to apply to Hong Kong Customs for a two-year license. After 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 the legislative bill on the OTC virtual asset licensing system to the Legislative Council as soon as possible.
Key requirements for OTC virtual asset business operators include:
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For physical OTC operations: a suitable premises in Hong Kong;
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For online OTC operations: a management office, correspondence address, and location for storing books and records in Hong Kong;
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Employment of at least one qualified compliance officer;
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Employment of at least one qualified anti-money laundering reporting officer;
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Having a suitable corporate structure and experienced, knowledgeable personnel managing the business;
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Conducting business honestly, fairly, and diligently;
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Implementing appropriate risk management measures, including AML/CFT policies and procedures;
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Maintaining records of transactions and fund flows, and providing a complete list of wallets used in the business.
Under the proposal, licensed OTC virtual asset businesses from Hong Kong Customs will not be allowed to convert between virtual assets, but may provide conversion services between virtual and fiat currencies. If a business wishes to conduct fiat-to-fiat currency conversions, it must also obtain a Money Service Operator (MSO) license in Hong Kong.
The proposal includes investor protection measures: OTC virtual asset businesses cannot offer retail investors any virtual assets that are not tradable on SFC-licensed VATPs, nor can they offer virtual assets issued by stablecoin issuers not authorized by the Hong Kong Monetary Authority (HKMA). These restrictions do not apply to individuals qualifying as professional investors under Hong Kong regulations.
After the proposal takes effect, existing OTC virtual asset businesses will have a six-month transition period. During this time, they may only continue operating if they submitted a license application within the first three months of the transition period.
Singapore
Cryptocurrency regulation in Singapore is administered by the Monetary Authority of Singapore (MAS), primarily governed by the Payment Services Act (PSA). Platforms facilitating OTC crypto transactions may be deemed to provide crypto services and thus fall under PSA regulation. Specifically, the following crypto-related services are currently classified under the PSA as regulated activities for crypto service providers:
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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 issuance and/or sale of cryptocurrencies;
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Transferring or transmitting cryptocurrencies from one crypto address to another;
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Directing (or attempting to direct) any person to buy or sell cryptocurrencies (without the crypto service provider actually accessing any funds or DPTs).
If a company provides crypto services in Singapore, it must 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 threshold is defined as averaging monthly transactions of up to SGD 3 million in crypto value within a calendar year. Conversely, companies intending to offer crypto services without transaction or capital limits must apply for a Major Payment Institution license. This means that if a company's average monthly total value of all crypto transactions exceeds SGD 3 million in a calendar year, it must hold a Major Payment Institution license. Given that the PSA aims to safeguard payment services, the application process for a crypto services license can be lengthy and complex.
Regarding anti-money laundering, the PSA mandates compliance with AML/CFT procedures, rigorous customer due diligence, and transaction monitoring. MAS regulates OTC trading under the PSA, ensuring market makers and OTC platforms meet specific requirements. Recent developments include stricter regulations for DPT service providers, emphasizing compliance within its jurisdiction. Looking ahead, Singapore seeks to enhance regulatory clarity, mitigate crypto-related risks, and simultaneously foster innovation.
United States
Cryptocurrency regulation in the United States involves 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 this multi-agency oversight, cryptocurrency exchanges and OTC dealers must comply with stringent regulations and requirements.
First, cryptocurrency exchanges must register with FinCEN as a Money Services Business (MSB) and implement comprehensive AML and KYC measures, including customer identification verification, transaction monitoring, and filing suspicious activity reports (SARs). These measures aim to prevent money laundering and terrorist financing and ensure platforms meet regulatory standards.
Second, the SEC oversees crypto transactions involving securities. If a cryptocurrency qualifies as a security, the exchange must comply with SEC securities regulations, including registration and disclosure obligations. Meanwhile, the CFTC regulates crypto treated as commodities, such as Bitcoin and Ethereum futures contracts. Exchanges must adhere to relevant commodity futures regulations to ensure market transparency and fairness.
In recent years, both the SEC and CFTC have continuously issued guidance and enforced regulations to strengthen oversight of the crypto market. These efforts focus on investor protection and market integrity, aiming to establish a clear regulatory framework in the rapidly evolving digital asset space.
Regarding recent U.S. regulatory developments on virtual assets, California’s Digital Financial Assets Law (DFAL) will take effect on July 1, 2025. The DFAL will regulate “digital financial assets” and require companies engaging in “digital financial asset business activities” to obtain a license from the Department of Financial Protection and Innovation (DFPI), with certain exemptions—similar to New York’s BitLicense. To obtain a BitLicense, applicants must submit a comprehensive application to the New York State Department of Financial Services, including detailed information on business operations, compliance policies, AML/KYC procedures, cybersecurity measures, and financial condition.
Once DFAL becomes effective, OTC crypto dealers operating in California will be required to obtain licenses, along with other businesses involved in the following categories:
Exchange or issue digital financial assets: Exchange, transfer, or store digital financial assets, or issue convertible digital financial assets.
Hold electronic precious metals: Hold electronic precious metals or digital certificates representing ownership shares in precious metals on behalf of others, or issue shares or digital certificates representing interests in precious metals.
Exchange gaming currency/tokens: Exchange gaming currency or tokens either to obtain digital financial assets from game or app publishers or to acquire real-world currency.
With DFAL, California will become the third U.S. state—after New York and Louisiana—to establish a licensing regime specifically for crypto assets.
Going forward, the U.S. faces challenges in enhancing regulatory clarity, effectively combating market manipulation and fraud, and promoting technological innovation and market growth while protecting investor interests. This will require continuous refinement of regulatory policies by various agencies and sustained responsiveness to market changes, ensuring the U.S. maintains competitiveness and leadership in the global cryptocurrency market.
Overall, the similarities and differences among Hong Kong, Singapore, and the U.S. in cryptocurrency regulation are evident in areas such as regulatory authorities, legal frameworks, licensing requirements, AML obligations, OTC oversight, recent developments, and future challenges. Each region’s regulatory environment reflects distinct market demands and policy objectives.
Below is a visual comparison.
Outlook for Cryptocurrency OTC Trading
As discussed above, Hong Kong, Singapore, and the United States—each a global financial hub—have distinctive approaches to regulating cryptocurrencies and OTC trading. Below we analyze the prospects and attractiveness of OTC trading in these three regions.
Hong Kong
Hong Kong has adopted a proactive regulatory stance toward cryptocurrency OTC trading through the SFC, demonstrating strong commitment to this sector. The introduction of a licensing regime under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO) reflects Hong Kong’s dedication to investor protection and regulatory clarity. This system aims to ensure market participants operate within a regulated environment. However, strict compliance requirements and the transition from an unregulated phase may initially pose challenges, requiring market participants to adapt to the new landscape. While complex, this process is expected to foster a more stable and credible market in the long run.
By positioning itself as a regulated hub for crypto activities, Hong Kong could attract institutional investors seeking compliant platforms. Offering a regulated and transparent market environment, Hong Kong is poised to become a major cryptocurrency trading hub in Asia, drawing greater interest from both international and domestic investors.
Singapore
Singapore’s regulatory framework under the Payment Services Act (PSA) continues to evolve, aiming to strengthen investor protections and impose stricter oversight on digital payment token (DPT) service providers involved in OTC trading. The Monetary Authority of Singapore (MAS) demonstrates a cautious yet supportive approach toward the crypto market through rigorous licensing and compliance standards, along with recent emphasis on custodial responsibilities. These measures enhance market transparency and security, boosting investor confidence.
By combining strict regulatory oversight with support for innovation, Singapore becomes highly attractive to companies seeking to operate compliantly within a secure regulatory environment. This balanced approach creates a favorable ecosystem for crypto firms, solidifying Singapore’s role as a leader in fintech innovation across the Asia-Pacific region.
United States
The U.S. OTC crypto trading environment is complex, with market participants facing stringent regulatory demands due to dual oversight by the SEC and CFTC, as well as AML and KYC compliance obligations enforced by FinCEN. While there has been progress toward regulatory clarity in securities and commodities trading in recent years, strict requirements and occasional regulatory uncertainty may still pose challenges for new market entrants.
Despite these hurdles, the U.S. market remains attractive due to its deep liquidity and maturity. Once compliance barriers are overcome, these attributes may draw larger institutional players. The U.S.’s robust financial infrastructure and culture of innovation maintain its significance in the global crypto market, appealing to enterprises aiming to operate in a large-scale, mature environment.
Overall, Singapore, with its clear regulatory framework, strong investor protections, and supportive stance toward financial technology innovation, is well-positioned to attract a broad range of OTC crypto trading activities. Meanwhile, Hong Kong and the U.S. are advancing their respective regulatory and market development strategies. Despite facing unique challenges, each offers distinct opportunities and environments for crypto market participants. By understanding and adapting to the regulatory characteristics of these regions, market players can better plan their global expansion strategies.
Conclusion
As global acceptance of cryptocurrencies continues to grow, Hong Kong, Singapore, and the United States—as leading financial centers—exhibit diverse strategies and strengths in regulating cryptocurrencies and OTC trading. Market participants should choose the most suitable jurisdiction based on their own needs and goals. In an ever-evolving global crypto landscape, understanding and adapting to regional regulatory dynamics is crucial to seizing opportunities and achieving sustainable growth.
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