OTC dealers, 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 dealers 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 show 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 dealers also face a series of compliance challenges.
Compliance Challenges for OTC Traders
The regulatory framework of the crypto industry is relatively loose compared to that of traditional financial markets, which makes OTC traders face compliance uncertainties 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 traders requires them to handle large transactions, which are usually not disclosed in the market price, increasing the risk of market manipulation and information asymmetry. In the absence of transparent prices, OTC traders need to take additional measures to ensure the fairness and price stability of transactions and avoid market artificial influence.
In addition, OTC traders often participate in cross-border transactions and face regulatory requirements in different jurisdictions. The differences in regulatory standards in various 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.
Against such background, OTC trader licenses have become particularly critical.
By obtaining a legitimate license, 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 successively formulated relevant legislation and licensing matters.
Next, Mankiw will sort out the legislative status of these regions one by one and explore their requirements for OTC trader licenses and their respective compliance requirements.
1. Hong Kong: OTC Trader Regulatory Legislation
In February 2024, the Financial Services and Treasury Bureau (FSTB) of Hong Kong issued a legislative consultation document on virtual asset over-the-counter (OTC) services, proposing the introduction of an OTC trader licensing system through the Anti-Money Laundering and Terrorist Financing Ordinance (AMLO), and 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 providing 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 traders to meet the following core compliance requirements:
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 processing large transactions, identity verification and transaction monitoring. Every transaction requires customer identification and reporting when suspicious activities are found.
OTC traders are required to submit detailed compliance documents to the regulatory authorities, 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.
Hong Kong Customs will be responsible for the continuous supervision of OTC traders to ensure that they comply with all relevant anti-money laundering regulations and regularly review their compliance. In particular, in terms of large 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 established by the Act, especially in the following core aspects:
MiCA requires OTC dealers to implement strict anti-money laundering (AML) and customer identity verification (KYC) policies to ensure that their trading activities are not used for illegal capital flows, money laundering or financing terrorist activities. OTC dealers must implement 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 dealers need to identify and verify the identity of the customer and report any suspicious activities.
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 comply with MiCA requirements. 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.
MiCA not only involves OTC traders' trading compliance requirements, but also extends to the issuance and custody services of crypto assets. Crypto asset issuers, trading platforms and OTC traders must comply with market transparency requirements and publish sufficient risk disclosures to avoid damage to investors. OTC traders need to ensure the transparency of their trading activities and prevent the impact of opaque trading behaviors on market prices and asset stability.
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 data privacy and legal conflicts, such as the strict requirements of the EU's GDPR on data protection.
3. United States: Current status of decentralized regulation
In the United States, there is currently no unified regulatory framework specifically for OTC traders (over-the-counter dealers). Therefore, the regulation of OTC traders mainly depends on whether virtual assets are defined as securities and the type of business involved.
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 duties of OTC traders. The specific requirements depend on the type of operation of the OTC trader and the nature of the virtual assets.
SEC supervision: 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 a virtual asset constitutes a security. If a virtual asset is defined as a security, the OTC trader needs to comply with the provisions of the securities law and may need to register as a securities broker and be 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 trader is identified as engaging in money service 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 traders are required to fulfill suspicious transaction reporting obligations and implement customer due diligence (CDD) procedures to ensure that their business complies with the United States' financial crime prevention and control requirements.
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 dedicated regulatory framework for OTC traders. According to the BitLicense system, any company that provides virtual currency-related services in New York State, including OTC traders, must obtain a BitLicense license. The core content of the license system includes:
Therefore, when OTC traders operate in New York State, they must meet all the compliance requirements of the BitLicense. This also means that for OTC traders operating across states, in addition to federal-level supervision, they must also consider the different regulatory requirements that may exist in each state.
Compliance advice from Mankiw lawyers
By comparing the regulatory systems of Hong Kong, the European Union, and the United States, 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 being formulated. It 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.
Therefore, given the differences in regulatory systems in various 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 traders should consider setting up dedicated compliance teams in major operating areas to be responsible for in-depth understanding and tracking of local regulatory changes. Especially in the United States, since each state has different compliance requirements, the establishment of local compliance teams can help OTC traders cope with the regulatory requirements of specific regions and ensure the compliance of cross-state operations.
2. Develop a globally unified KYC/AML compliance policy
Although the specific requirements of different regions vary, OTC traders can still develop a globally unified anti-money laundering (AML) and customer identity verification (KYC) compliance framework, and use this 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 worldwide, especially in regions such as the EU and the United States, 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 traders avoid potential risks caused by non-compliant customers.
4. Strengthen transaction monitoring and compliance review
OTC traders should use advanced transaction monitoring systems to track and detect potential market manipulation and price manipulation in real time, especially in the case of low transparency in the crypto market. These systems can help OTC traders ensure the fairness and transparency of large transactions and ensure compliance with the response mechanisms to market manipulation in various regions.
5. Conduct cross-border compliance training and audits regularly
As the global regulatory environment changes, OTC dealers 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, internal compliance audits should be conducted regularly to evaluate the effectiveness of existing compliance measures and ensure that operations around the world comply with local laws and regulations.
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