Overview of Cryptocurrency OTC Dealer Licenses: What Are the Differences in Legal Compliance Between Hong Kong, the EU, and the US?
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Overview of Cryptocurrency OTC Dealer Licenses: What Are the Differences in Legal Compliance Between Hong Kong, the EU, and the US?
As the market expands, OTC traders also face a series of compliance challenges.
Navigating Web3 tides with focused insightsAuthors: Iris, Shao Jiaiod
OTC desks, as core participants in the virtual asset market, focus on providing large-scale trading platforms for high-net-worth clients, institutional investors, and exchanges. Through customized trading mechanisms, OTC desks ensure that large-volume transactions are completed smoothly without disrupting market prices, while offering clients greater privacy, transaction security, and liquidity assurance.
Relevant data shows that in 2024, OTC trading volume increased by 106% year-on-year, reflecting significantly heightened market activity and rising industry demand for OTC services. Among this, stablecoins dominate—accounting for approximately 95% of trading volume, with a full-year growth of 147%. In terms of regional distribution, Europe leads in institutional OTC trading, representing 38.5% of demand, followed by North America, Asia, and the Middle East, each accounting for 15.4%.
However, as the market expands, OTC desks also face a series of compliance challenges.
Compliance Challenges Facing OTC Desks
Compared to traditional financial markets, the regulatory framework for the crypto industry is relatively loose, leaving OTC desks facing regulatory uncertainty across different regions globally. Although the global regulatory environment is gradually tightening, especially in areas such as anti-money laundering (AML) and know-your-customer (KYC), OTC desks still need to navigate evolving legal and regulatory requirements.
At the same time, the business model of OTC desks requires handling large-volume trades, which typically occur off public market prices, increasing risks of market manipulation and information asymmetry. Without transparent pricing, OTC desks must take additional measures to ensure fairness and price stability in transactions, preventing artificial market influence.
In addition, OTC desks often engage in cross-border transactions, exposing them to varying jurisdictional regulations. Divergent regulatory standards across regions require OTC desks to continuously adapt their compliance strategies to meet legal requirements in different markets. Particularly regarding data protection and privacy policies, the complexity of cross-border compliance significantly increases compliance risks for OTC desks.
Under these circumstances, OTC desk licensing becomes particularly critical.
By obtaining legitimate licenses, OTC desks can not only ensure compliance with local laws but also enhance their credibility and competitiveness in an increasingly stringent regulatory environment.
Current Status of OTC Desk Licensing
However, across countries and regions globally, regulatory frameworks for OTC desks have not yet been fully unified. Despite this, key jurisdictions where OTC desks operate—such as Hong Kong, the EU, and the U.S.—have begun introducing relevant legislation and licensing regimes.
Next, ManQin Law will review the legislative status in these regions, exploring their respective OTC desk licensing frameworks and compliance requirements.
1. Hong Kong: OTC Desk Regulatory Legislation
The Hong Kong Financial Services and the Treasury Bureau (FSTB) released a consultation paper in February 2024 on legislation for virtual asset over-the-counter (OTC) services, proposing the introduction of an OTC desk licensing regime under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO). This legislative framework is expected to be implemented soon.
Under the proposal, Hong Kong plans to introduce an OTC desk licensing system via the AMLO to ensure companies comply with anti-money laundering (AML) and know-your-customer (KYC) requirements. All firms offering virtual asset OTC trading services, including OTC desks, will need to apply for a license from the Hong Kong Customs and Excise Department (C&ED) and strictly adhere to these legal provisions. As of April 2025, the legislation remains in the consultation phase, with specific implementation details and effective dates pending final government announcement.
This framework requires OTC desks to meet the following core compliance requirements:
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Anti-Money Laundering (AML) and Know-Your-Customer (KYC)
Licensing mandates OTC desks to implement strict AML and KYC policies to ensure their trading activities are not used for illegal fund flows, money laundering, or terrorist financing. OTC desks must conduct risk-based customer due diligence (CDD) procedures, particularly during large-volume transactions, including identity verification and transaction monitoring. Each transaction must involve customer identification, with suspicious activities reported accordingly.
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Compliance Documentation Requirements
OTC desks must submit detailed compliance documents to regulators, including AML policies, KYC procedures, and risk management measures. These documents serve to demonstrate that OTC desks have taken necessary steps to comply with relevant AML and customer protection regulations.
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Ongoing Regulation and Compliance Oversight
The Hong Kong Customs and Excise Department will oversee ongoing compliance of OTC desks, ensuring adherence to all applicable AML regulations and conducting regular compliance reviews. Particularly concerning large-volume transactions and market transparency, enhanced supervision will ensure that OTC desk activities remain lawful and transparent.
2. European Union: MiCA Regulation
The EU's MiCA regulation provides a unified regulatory framework covering crypto-asset service providers (CASP), including over-the-counter (OTC) desks. While MiCA does not establish a separate 'OTC desk' category, any entity engaged in crypto services defined under MiCA—such as order execution, trading facilitation, or custody—must register as a CASP. Under this regulation, an OTC desk licensed in one EU member state can operate throughout the European Economic Area (EEA).
At the same time, OTC desks must meet higher compliance standards set by the regulation, particularly in the following key areas:
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Anti-Money Laundering (AML) and Know-Your-Customer (KYC)
MiCA requires OTC desks to implement strict AML and KYC policies to prevent use of their services for illicit fund flows, money laundering, or terrorist financing. OTC desks must carry out risk-based customer due diligence (CDD), especially during large-volume transactions, involving rigorous identity verification and transaction monitoring. For every transaction, OTC desks must identify and verify customer identities and report any suspicious activities.
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Compliance Documentation Requirements
OTC desks must submit compliance documentation to regulators, including AML policies, risk management measures, and capital adequacy requirements, demonstrating compliance with MiCA. Beyond AML/KYC, MiCA requires OTC desks to establish effective risk management frameworks to guard against market manipulation, price volatility, and systemic risks, ensuring operational transparency and stability.
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Issuance, Trading, and Custody of Virtual Assets
MiCA extends beyond transaction compliance for OTC desks to include issuance and custody of crypto assets. Issuers, trading platforms, and OTC desks must meet market transparency requirements and provide adequate risk disclosures to prevent investor harm. OTC desks must ensure transaction transparency and avoid influencing market prices or asset stability through opaque trading practices.
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Cross-Border Compliance Requirements
MiCA emphasizes cross-border compliance, meaning that even OTC desks operating outside the EU must comply with its rules. This requires consistent compliance measures in cross-border transactions, especially in AML and consumer protection. Given differing legal requirements between the EU and other regions, OTC desks must address compliance coordination across jurisdictions, particularly concerning data privacy and legal conflicts, such as GDPR’s strict data protection mandates.
3. United States: Fragmented Regulatory Landscape
In the U.S., there is currently no dedicated, unified regulatory framework specifically for OTC desks (over-the-counter dealers). Therefore, regulation of OTC desks primarily depends on whether the virtual assets involved are classified as securities and the nature of the business activities conducted.
U.S. regulatory bodies such as the Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC), and Financial Crimes Enforcement Network (FinCEN) share partial oversight responsibilities over OTC desks, with specific requirements depending on the type of operations and the nature of the virtual assets.
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SEC Regulation: If the virtual assets traded by an OTC desk are deemed securities, those transactions fall under the jurisdiction of the U.S. Securities and Exchange Commission (SEC). The SEC uses the Howey Test to determine whether a virtual asset qualifies as a security. If classified as a security, the OTC desk must comply with securities laws, potentially registering as a broker-dealer and meeting associated regulatory obligations. Assets not meeting the definition of a security are not subject to SEC oversight.
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Financial Crimes Enforcement Network (FinCEN): If an OTC desk is considered to be conducting money services business, it must register with FinCEN and comply with anti-money laundering (AML) and counter-terrorist financing (CFT) regulations. OTC desks are required to file suspicious activity reports and implement customer due diligence (CDD) procedures to ensure compliance with U.S. financial crime prevention standards.
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CFTC Regulation: For OTC desks involved in futures and derivatives trading of virtual assets, the Commodity Futures Trading Commission (CFTC) may assert regulatory authority. The CFTC treats certain virtual assets (e.g., Bitcoin) as commodities, thus bringing related futures contracts and derivative products under its supervision.
At the state level, New York’s BitLicense regime provides a specific regulatory framework for OTC desks. Under the BitLicense system, any company offering virtual currency-related services in New York State—including OTC desks—must obtain a BitLicense. Key components of this licensing regime include:
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Anti-money laundering (AML) and know-your-customer (KYC) requirements, ensuring OTC desks strictly comply with financial crime prevention regulations.
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Capital adequacy requirements, ensuring OTC desks maintain sufficient financial stability during operations.
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Reporting and compliance obligations, requiring OTC desks to regularly submit operational and financial reports to regulators to ensure regulatory compliance.
Therefore, OTC desks operating in New York must meet all BitLicense compliance requirements. This also means that for OTC desks operating across multiple states, compliance must account for both federal regulations and varying state-level requirements.
ManQin Law Compliance Recommendations
By comparing the regulatory systems of Hong Kong, the EU, and the U.S., we observe significant differences in OTC desk licensing frameworks. As such, OTC desks operating globally must pay special attention to these variations and make corresponding adjustments:
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Hong Kong: The licensing regime is still being developed, expected to resemble the VASP license framework, emphasizing AML and KYC compliance, and ensuring transparency and legitimacy in fund flows during large-volume transactions.
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European Union: The MiCA regulation focuses on cross-border compliance and market transparency. For globally operating OTC desks, adherence to the EU’s strict rules on market transparency, investor protection, and consumer rights is essential.
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United States: Regulation is fragmented, with emphasis on localized control. Differing state-level regulations impose additional compliance costs on OTC desks operating across multiple states.
Given the divergent regulatory landscapes across regions, OTC desks must adopt flexible compliance strategies when operating globally to adapt to various legal requirements and effectively mitigate compliance risks. For example:
1. Establish Cross-Regional Compliance Teams
OTC desks should consider setting up dedicated compliance teams in major operational regions to closely monitor and track local regulatory developments. In the U.S., where compliance requirements vary by state, having localized compliance teams helps OTC desks meet region-specific regulations and ensures cross-state compliance.
2. Develop a Globally Unified KYC/AML Compliance Policy
Despite differing regional requirements, OTC desks can establish a globally unified AML and KYC compliance framework, adapting it to meet specific local regulations as needed.
3. Strengthen Customer Due Diligence (CDD) and Background Checks
Implement rigorous CDD procedures globally, especially in regions like the EU and U.S., to ensure the legality and transparency of all customer information and conduct necessary background checks. This not only meets KYC requirements but also helps OTC desks avoid potential risks associated with non-compliant clients.
4. Enhance Transaction Monitoring and Compliance Review
OTC desks should deploy advanced transaction monitoring systems to detect potential market manipulation and price distortion in real time, particularly in low-transparency crypto markets. These systems help ensure fairness and transparency in large-volume transactions and align with regional mechanisms for addressing market manipulation.
5. Conduct Regular Cross-Border Compliance Training and Audits
As the global regulatory landscape evolves, OTC desks should conduct regular cross-border compliance training to ensure staff understand the latest regulatory requirements and compliance procedures across jurisdictions. Additionally, regular internal compliance audits should be performed to evaluate the effectiveness of current compliance measures and ensure global operations meet local legal standards.
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