Hong Kong-licensed virtual currency exchange enters OTC market
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Hong Kong-licensed virtual currency exchange enters OTC market
Off-exchange does not mean illegal, and being licensed does not mean safe.
Navigating Web3 tides with focused insightsBy Liu Honglin
A year after last stepping into the Hong Kong Web3 Festival venue, Lawyer Honglin noticed something intriguing: several licensed virtual asset trading platforms in Hong Kong were actively expanding into over-the-counter (OTC) cryptocurrency trading.
You might have seen it on a street corner in Wan Chai or Causeway Bay—a storefront resembling a bank counter with signs reading "Digital Asset Exchange." Step inside, and you can swap USDT, withdraw BTC, or even get a bundle of stablecoins transferred directly into your local Hong Kong bank account.
What does this have to do with regulated exchanges? Surprisingly, many of these seemingly "local money changers" are strategic partners of compliant, licensed platforms. This raises questions: if exchanges operate within formal markets, why are they now venturing into OTC—essentially street-level currency swapping? Is this the dual cultivation path for Hong Kong’s Web3 entrepreneurs?
Two years ago, such a scenario would’ve been surprising. Traditionally, once a platform obtains a license, it should focus on order-matching engines, settlement integration, and maintaining compliance systems. Now, instead, they're diving into direct coin exchange—a move that sounds like a downgrade. But once you examine the current profitability of Hong Kong’s compliant exchanges and the realities of capital flows between mainland China and Hong Kong, this shift becomes not only logical but inevitable.
We must acknowledge a reality: the core assets and users in today’s crypto industry largely remain under the control of mainland China. Whether they’re crypto-native investors, traditional business owners transitioning into digital assets, or cross-border trade teams operating in the Middle East, Africa, or Southeast Asia, they use cryptocurrencies as financial conduits, for hedging currency risks, or facilitating overseas settlements. Simply put, the traffic and capital still originate from the mainland.
But here's the problem: Hong Kong’s licensed exchanges cannot legally serve mainland residents. Nearly all licensed platforms explicitly state in their legal documents, “We do not provide services to residents of mainland China.” Many users are blocked right at the first step of KYC verification. Claim to be an overseas Chinese citizen? Fine—but you’ll need to present foreign identification, a non-mainland phone number, and provide a clear explanation of your fund sources and investment intent. While technically compliant, the barriers are extremely high.
So what’s the solution? Exchanges can’t just run idle without revenue. OTC has thus become an accepted “buffer zone.”
OTC, simply put, refers to direct bilateral conversion between digital assets and fiat currencies without going through an order-matching system—facilitated either peer-to-peer or via intermediaries. In Hong Kong, such transactions offer greater flexibility in serving demand from mainland China or other non-compliant regions. Moreover, since OTC services currently fall outside the scope of the virtual asset platform licensing regime, they exist in a regulatory gray area. In other words, amid strict on-exchange regulations, OTC serves as a practical outlet to ease compliance constraints and expand operational space.
More importantly, many OTC use cases reflect genuine market needs. For example, a Shenzhen-based entrepreneur who previously used USD to pay suppliers in the Middle East may now face foreign exchange quota limits and volatile exchange rates. Converting RMB into USDT and routing it through Hong Kong becomes a smarter alternative. Or consider an institutional client wanting to buy crypto via a licensed Hong Kong exchange but unable to open an account. Their workaround? First complete the initial purchase via OTC, then transfer funds from off-exchange to on-exchange.
It becomes clear then that these compliant exchanges’ involvement in OTC isn't impulsive—it's a natural extension of the value chain. If transaction fees alone won’t sustain operations, adding OTC conversion fees or capturing some market-making revenue becomes essential. Running an exchange in Hong Kong often requires tens of millions of dollars annually in operating costs. Relying solely on a few hundred institutional arbitrageurs or sporadic project listing fees simply isn’t viable.
This explains why we now see numerous OTC outlets—resembling traditional money changers—emerging in Central, Causeway Bay, and even near Sheung Wan MTR station. Their slogans emphasize “security and convenience,” “support for HKD, USD, wire transfers,” and more. Walk in, and staff will ask which coins you want to exchange, where you plan to send them, and even offer targeted transfer services. These shops are either official partners of licensed exchanges or unofficial “shadow branches” quietly backed by exchange resources.
This operational model is gradually becoming industry standard: compliant on-exchange, flexible off-exchange—two sides of the same coin. Through third-party partnerships, technical integrations, or “affiliated but uncontrolled” structures, exchanges effectively navigate regulatory boundaries while establishing a more controllable entry point for capital flows.
Yet this market isn’t risk-free. Since the second half of 2024, Hong Kong regulators have taken note of the rapid expansion of the OTC market and have signaled multiple times their intention to establish a dedicated regulatory framework for OTC services. It’s understood that a draft licensing regime for virtual asset OTC services is under preparation. Before long, these money changers may also enter a “licensed era.”
This is precisely why not only compliant exchange teams are eyeing this space—veteran USDT trading groups from mainland China are also scouting office spaces in Hong Kong, or setting up shell companies under local nominees, all aiming to seize the window before regulations tighten. Everyone knows that once formal OTC rules take effect, entry barriers and compliance costs will rise sharply. Those who don’t position themselves early will likely be wiped out when the next wave of regulation hits.
The development of the virtual asset industry has never followed a simple “black-and-white” script. Between compliance and reality, every player seeks the most sustainable position. Understanding the true meaning of “compliance dividend” is key—not merely the ability to launch a licensed platform, but building a system that operates within compliance while still accessing real market demand and running viable businesses.
Off-exchange doesn’t mean illegal; holding a license doesn’t guarantee safety. What matters most has always been the design of the pathway and the timing of execution.
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