Overview of Cryptocurrency OTC Business Licenses: What are the Legal Compliance Differences between Hong Kong, the EU, and the USA?

Author: Iris, Shao Jiadian

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

Relevant data shows that in 2024, OTC trading volume increased by 106% year-on-year, reflecting a significant rise in market activity and industry demand for OTC services. Among these, stablecoins dominate—accounting for about 95% of the trading volume, with an annual trading volume growth of 147%. Additionally, in terms of market distribution, Europe dominates 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, with the expansion of the market, OTC traders also face a series of compliance challenges.

Compliance Challenges for OTC Traders

The regulatory framework for the crypto industry is relatively loose compared to traditional financial markets, which exposes OTC traders to 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 cope with changing legal and regulatory requirements.

At the same time, the business model of OTC traders requires them to handle large transactions, which typically do not 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 and price stability of transactions, avoiding artificial market influences.

Moreover, OTC traders often engage in cross-border transactions, facing regulatory requirements from different jurisdictions. The differences in regulatory standards across regions mean that OTC traders must continuously adjust their compliance strategies to ensure their operations comply with legal requirements in different markets. Particularly in terms of data protection and privacy policies, the complexity of cross-border compliance significantly increases the compliance risks for OTC traders.

In this context, obtaining an OTC trader license becomes particularly crucial.

By obtaining a legitimate license, OTC traders can not only ensure compliance 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, the regulatory framework for OTC traders has not yet been fully unified across countries and regions. Nevertheless, countries and regions where OTC operations are primarily based, such as Hong Kong, the European Union, and the United States, have gradually formulated relevant legislation and licensing matters.

Next, Mankun Law Firm will systematically outline the legislative status in these regions and explore their licensing and compliance requirements for OTC traders.

1. Hong Kong: OTC Trader Regulatory Legislation

The Hong Kong Financial Services and the Treasury Bureau (FSTB) released a legislative consultation document on virtual asset over-the-counter (OTC) services in February 2024, proposing the introduction of an OTC trader licensing system through the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO), with the legislative framework expected to be introduced soon.

According to the proposal, Hong Kong plans to introduce a licensing system for OTC traders through the AMLO to ensure that these companies comply with AML and KYC requirements. All companies providing virtual asset OTC trading services, including OTC traders, must apply for relevant licenses from Hong Kong Customs (CCE) and strictly adhere to these legal provisions. As of April 2025, this 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 Customer Identity Verification (KYC)

The license requires OTC traders to implement strict AML and KYC policies to ensure that their trading activities are not used for illegal fund flows, money laundering, or terrorist financing. OTC traders must execute risk-based customer due diligence (CDD) procedures, especially when handling large transactions, conducting identity verification and transaction monitoring. Each transaction requires customer identity verification, and suspicious activities must be reported.

Compliance Documentation Requirements

OTC traders must submit detailed compliance documents to regulatory authorities, including their AML policies, customer identity verification procedures, risk management measures, etc. These documents will be used to demonstrate that OTC traders have taken necessary measures to comply with relevant AML and customer protection regulations.

Ongoing Supervision and Compliance Monitoring

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

2. European Union: MiCA Regulation

The EU's MiCA regulation provides a unified regulatory framework covering crypto asset service providers (CASPs), including OTC traders. Although MiCA does not establish a separate category for "OTC traders," those engaging in crypto services defined under MiCA (such as order execution, trade matching, or asset custody) must register as CASPs. According to this regulation, OTC traders within 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 traders must comply with the higher compliance requirements established by the regulation, particularly in the following core areas:

Anti-Money Laundering (AML) and Customer Identity Verification (KYC)

MiCA requires OTC traders to implement strict AML and KYC policies to ensure that their trading activities are not used for illegal fund flows, money laundering, or terrorist financing. OTC traders must execute risk-based customer due diligence (CDD) procedures, especially during large transactions, conducting strict identity verification and transaction monitoring. Specifically, for each transaction, OTC traders need to identify and verify customer identities and report any suspicious activities.

Compliance Documentation Requirements

OTC traders must submit compliance documents to regulatory authorities, including AML policies, risk management measures, capital requirements, etc., to demonstrate that they have taken measures to comply with MiCA's requirements. In addition to AML/KYC policies, MiCA also requires OTC traders to establish effective risk management frameworks to prevent market manipulation, price volatility, 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' transactions 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 adequate 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, meaning that even if OTC traders operate outside the EU, they still need to comply with MiCA's regulations. This requires OTC traders to adopt consistent compliance measures in cross-border transactions, especially in terms of AML and consumer protection. Due to potential differences in legal requirements between the EU and other regions, OTC traders need to address compliance coordination issues between different jurisdictions, particularly regarding data privacy and legal conflicts, such as the strict data protection requirements posed by the EU's GDPR.

3. United States: Decentralized Regulatory Landscape

In the United States, there is currently no unified regulatory framework specifically for OTC traders (over-the-counter traders). Therefore, the regulation of OTC traders primarily depends on whether the virtual assets are defined as securities and the types 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 certain regulatory duties concerning OTC traders, with specific requirements varying based on the type of operations and the nature of the virtual assets.

SEC Regulation: If the virtual assets traded by OTC traders are considered securities, then their transactions will be subject to regulation by the 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, 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 OTC traders are deemed to be engaged in money services businesses, they must also register with FinCEN and comply with 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 their operations comply with U.S. financial crime prevention requirements.
CFTC Regulation: For OTC traders involved in virtual asset futures and derivatives, the CFTC may intervene in regulation. The CFTC views certain virtual assets (such as Bitcoin) as commodities, thus subjecting related futures contracts and derivatives trading to its regulation.

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

AML and KYC requirements to ensure that OTC traders strictly comply with financial crime prevention regulations.
Capital adequacy requirements to ensure that OTC traders maintain necessary financial stability during operations.
Reporting and compliance, requiring OTC traders to regularly submit operational and financial reports to regulatory authorities to ensure their activities comply with regulations.

Therefore, OTC traders operating in New York must meet all compliance requirements of the BitLicense. This also means that for OTC traders operating across state lines, in addition to federal-level regulations, they must also consider the potentially different regulatory requirements of each state.

Compliance Recommendations from Mankun Law Firm

By comparing the regulatory systems in Hong Kong, the EU, and the U.S., we can see significant differences in the OTC trader licensing systems across 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 developed, expected to be similar to the VASP license, focusing on AML and KYC, as well as ensuring the transparency and legality of fund flows in large transactions.
European Union: The MiCA regulation emphasizes cross-border compliance and market transparency. Particularly in global operations, OTC traders need to ensure compliance with the EU's strict regulations on market transparency, investor protection, and consumer rights.
United States: Regulation is decentralized but focuses on localized management. The differences in regulations across states impose additional compliance costs on OTC traders operating across state lines.

Therefore, given the differences in regulatory systems across regions, OTC traders need to adopt flexible compliance strategies to ensure they can adapt to the legal requirements of different areas and effectively mitigate compliance risks. For example:

1. Establish Cross-Regional Compliance Teams

OTC traders should consider establishing dedicated compliance teams in key operating regions to gain in-depth understanding and track local regulatory changes. Particularly in the United States, where compliance requirements vary by state, setting up local compliance teams can help OTC traders address specific regional regulatory requirements and ensure compliance in cross-state operations.

2. Develop a Global Unified KYC/AML Compliance Policy

Although specific requirements differ across regions, OTC traders can still establish a globally unified anti-money laundering (AML) and customer identity verification (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 like the EU and the U.S., 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 from non-compliant customers.

4. Enhance Transaction Monitoring and Compliance Review

OTC traders should utilize advanced transaction monitoring systems to track and detect potential market manipulation and price manipulation behaviors in real-time, especially in cases where transparency in the crypto market is low. These systems can help OTC traders ensure the fairness and transparency of large transactions and ensure compliance with regional mechanisms for responding to market manipulation.

5. Regularly Conduct Cross-Border Compliance Training and Audits

With the changing global regulatory environment, OTC traders should regularly conduct cross-border compliance training to ensure employees are aware of the latest regulatory requirements and compliance procedures in different regions. Additionally, regular internal compliance audits should be conducted to assess the effectiveness of existing compliance measures, ensuring that operations worldwide comply with local laws and regulations.

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