Overview of Crypto Assets OTC Business Licenses: What are the differences in legal Compliance between Hong Kong, the EU, and the US?

Author: Iris, Shao Jiadian

OTC traders, as core participants in the virtual asset market, focus on providing a large-scale trading platform for high-net-worth clients, institutional investors, and exchanges. Through customized trading mechanisms, OTC traders can ensure that large transactions are completed smoothly without disrupting market prices, while also providing clients with higher privacy, trading security, and liquidity guarantees.

Relevant data shows that in 2024, OTC trading volume will increase by 106% year-on-year, reflecting a significant rise in market activity and industry demand for OTC. Among these, stablecoins dominate—accounting for about 95% of the trading volume, with an annual trading volume growth of 147%. Additionally, from a market distribution perspective, Europe holds a dominant position in 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, as the market expands, OTC merchants face a series of compliance challenges.

OTC business compliance challenges

The regulatory framework for the cryptocurrency industry is relatively loose compared to traditional financial markets, which creates compliance uncertainties for OTC traders in different regions around the world. Although the global regulatory environment is gradually tightening, especially in areas such as anti-money laundering (AML) and know your customer (KYC), OTC traders still need to cope with changing legal and regulatory requirements.

At the same time, the business model of OTC traders requires them to handle large transactions, which often do not publicly disclose market prices, increasing the risks of market manipulation and information asymmetry. In the absence of transparent pricing, OTC traders need to take additional measures to ensure the fairness of transactions and price stability, avoiding artificial influences on the market.

In addition, OTC traders often participate in cross-border transactions, facing regulatory requirements from different jurisdictions. The differences in regulatory standards across regions require OTC traders to continuously adjust their compliance strategies when conducting international business to ensure that their operations comply with legal regulations in different markets. Especially in terms of data protection and privacy policies, the complexity of cross-border compliance significantly increases the compliance risks for OTC traders.

Against this backdrop, OTC merchant licenses have become particularly critical.

By obtaining a legitimate license, OTC traders can not only ensure compliance with legal requirements in various regions but also enhance their credibility and market competitiveness in an increasingly stringent market environment.

Current Status of OTC Business Licenses

However, looking at countries and regions around the world, the regulatory framework for OTC merchants has not yet been fully unified. Nevertheless, countries and regions where OTC mainly operates, such as Hong Kong, the European Union, and the United States, have also gradually established relevant legislation and licensing matters.

Next, Lawyer Mankun will systematically review the legislative status of these regions and explore their requirements for OTC business licenses and their respective compliance obligations.

1. Hong Kong: Regulation of OTC Business

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 business license system through the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO), with the expectation 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 Counter-Terrorist Financing Ordinance (AMLO) to ensure that these companies comply with regulatory requirements such as Anti-Money Laundering (AML) and Know Your Customer (KYC). All companies providing virtual asset OTC trading services, including OTC traders, must apply for the relevant licenses from the Hong Kong Customs and Excise Department (CCE) and strictly adhere to these legal provisions. As of April 2025, the legislation is still in the consultation phase, and specific implementation details and effective dates are yet to be announced by the government.

This framework requires OTC traders to meet the following core compliance requirements:

Anti-Money Laundering (AML) and Know Your Customer (KYC)

License requirements mandate that OTC traders implement strict anti-money laundering and customer identification verification policies to ensure that their trading activities are not used for illegal fund flows, money laundering, or financing terrorism. OTC traders must carry out risk-based customer due diligence (CDD) procedures, especially when dealing with large transactions, to perform identity verification and transaction monitoring. Each transaction requires customer identification, and any suspicious activity must be reported.

Compliance document requirements

OTC merchants are required to submit detailed compliance documents to regulatory authorities, including their anti-money laundering policies, customer identification procedures, risk management measures, etc. These documents will be used to demonstrate that OTC merchants have taken the necessary steps to comply with relevant anti-money laundering and customer protection regulations.

Continuous regulation and compliance supervision

The Hong Kong Customs will be responsible for the continuous supervision of OTC traders to ensure compliance with all relevant anti-money laundering regulations and to regularly review their compliance. Particularly in terms of large transactions and market transparency, the Hong Kong Customs will strengthen compliance supervision of OTC traders to ensure that their trading activities are legal and transparent.

2. European Union: MiCA Bill

The EU's MiCA regulation provides a unified regulatory framework that covers cryptocurrency service providers, including over-the-counter (OTC) dealers (CASP). Although MiCA does not establish a separate category for 'OTC dealers,' if they engage in the types of cryptocurrency services defined under MiCA (such as order execution, trade matching, or asset custody), they are required to register as a CASP. According to the regulation, OTC dealers within the EU only need to obtain a cryptocurrency service provider (CASP) license in one member state to operate throughout the European Economic Area (EEA).

At the same time, OTC merchants also need to comply with the higher compliance requirements set by the legislation, especially in the following core areas:

Anti-Money Laundering (AML) and Know Your Customer (KYC)

MiCA requires OTC traders to implement strict anti-money laundering (AML) and know your customer (KYC) policies to ensure that their trading activities are not used for illegal fund flows, money laundering, or financing of terrorism. OTC traders must carry out risk-based customer due diligence (CDD) procedures, especially during large transactions, conducting rigorous identity verification and transaction monitoring. In particular, for each transaction, OTC traders need to identify and verify the customer's identity and report any suspicious activities.

Compliance document requirements

OTC dealers 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's requirements. In addition to AML/KYC policies, MiCA also requires OTC dealers to establish an effective risk management framework to guard against market manipulation, price fluctuations, and systemic risks, ensuring the transparency and stability of their operations.

Virtual asset issuance, trading, and custody

MiCA not only involves compliance requirements for OTC traders but also extends to the issuance and custody services of crypto assets. Issuers of crypto assets, trading platforms, and OTC traders must comply with market transparency requirements, providing sufficient risk disclosures to avoid harming investors. OTC traders 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, which means that even if OTC traders operate outside the European Union, they still need to adhere to MiCA regulations. This requires OTC traders to adopt consistent compliance measures in cross-border transactions, particularly in terms of anti-money laundering and consumer protection. Given that there may be different legal requirements in the EU and other regions, OTC traders need to address compliance coordination issues between different jurisdictions, especially regarding data privacy and legal conflicts, such as the strict data protection requirements imposed by the EU's GDPR.

3. United States: Current State of Decentralized Regulation

In the United States, there is currently no dedicated unified regulatory framework for OTC (over-the-counter) traders. Therefore, the regulation of OTC traders mainly relies on whether virtual assets are defined as securities and the types of business involved.

Regulatory agencies 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 certain regulatory duties over OTC traders, with specific requirements depending on the type of operations of the OTC traders and the nature of the virtual assets.

SEC Regulation: If the virtual assets traded by OTC traders are considered securities, then their trading 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 traders must comply with securities laws, which may require them to register as securities brokers and adhere to corresponding regulatory requirements. Assets that do not meet the definition of securities are not subject to SEC regulation.

Financial Crimes Enforcement Network (FinCEN): If an OTC dealer 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-terrorism financing (CFT) regulations. OTC dealers are required to fulfill suspicious transaction reporting obligations and implement customer due diligence (CDD) procedures to ensure their operations meet the financial crime prevention requirements of the United States.

CFTC Regulation: For OTC traders involved in virtual asset futures and derivatives, the Commodity Futures Trading Commission (CFTC) may intervene in regulation. The CFTC views certain virtual assets (such as Bitcoin) as commodities, thus related futures contracts and derivatives trading will be subject to its oversight.

However, at the state level, New York's BitLicense system provides a specialized regulatory framework for OTC dealers. According to the BitLicense system, any company providing virtual currency-related services in New York, including OTC dealers, must obtain a BitLicense. The core contents of this licensing system include:

Anti-Money Laundering (AML) and Know Your Customer (KYC) requirements ensure that OTC merchants strictly comply with financial crime prevention regulations.

Capital adequacy ratio requirements ensure that OTC merchants maintain necessary financial stability during their operations.

Reports and compliance, OTC merchants are required to regularly submit operational and financial reports to regulatory authorities to ensure their activities comply with regulations.

As a result, OTC vendors must meet all BitLicense compliance requirements when operating in New York State. This also means that OTCs operating across state lines must consider the possible different regulatory requirements of each state in addition to regulation at the federal level.

Mankun Lawyer Compliance Advice

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 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 formulated, 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 global operations, where OTC traders need to ensure adherence to the EU's strict regulations on market transparency, investor protection, and consumer rights.

United States: Regulation is decentralized but focuses on localized management, and the regulatory differences among states bring additional compliance costs for OTC traders operating across state lines.

Therefore, in view of the differences in regulatory systems across regions, OTC traders need to adopt flexible compliance strategies when operating globally to ensure 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 establishing dedicated compliance teams in their main operating regions to deeply understand and track local regulatory changes. Especially in the United States, where compliance requirements differ from state to state, having local compliance teams can help OTC traders address the regulatory requirements specific to those regions and ensure compliance across state operations.

2. Establish a global unified KYC/AML compliance policy

Although the specific requirements vary by region, OTC merchants can establish a unified global anti-money laundering (AML) and know your customer (KYC) compliance framework, which can then be adjusted based on the specific regulations of different regions.

3. Strengthen Customer Due Diligence (CDD) and Background Checks

Implement strict Customer Due Diligence (CDD) procedures globally, especially in regions such as the European Union and the United States, to ensure the legality and transparency of all customer information and conduct necessary background checks. This not only complies with KYC requirements but also helps OTC traders avoid potential risks associated with non-compliant clients.

4. Strengthen transaction monitoring and compliance review

OTC merchants should use advanced trading monitoring systems to track and detect potential market manipulation and price manipulation behavior in real-time, especially in situations where there is low transparency in the crypto market. These systems can help OTC merchants ensure the fairness and transparency of large transactions and ensure compliance with the response mechanisms to market manipulation in various regions.

5. Regularly conduct cross-border compliance training and audits

With the changes in the global regulatory environment, OTC merchants should conduct cross-border compliance training regularly to ensure that employees are aware of the latest regulatory requirements and compliance procedures in different regions. At the same time, internal compliance audits should be conducted regularly to assess the effectiveness of existing compliance measures, ensuring that operations comply with the laws and regulations in various places worldwide.