The global cryptocurrency market continues to evolve at a rapid pace, with over-the-counter (OTC) trading playing a pivotal role in facilitating large-scale transactions for institutions and high-net-worth individuals. While centralized exchanges (CEXs) recorded an impressive $4.29 trillion in trading volume during Q1 2024, OTC markets remain a critical component of the ecosystem—offering privacy, reduced price slippage, and customized settlement terms. However, due to their private nature, OTC transactions are harder to quantify but are undoubtedly expanding alongside broader market adoption.
This article compares the current regulatory landscapes and future outlooks for crypto OTC trading in three major financial hubs: Hong Kong, Singapore, and the United States. By analyzing licensing frameworks, anti-money laundering (AML) requirements, and recent policy developments, we aim to provide clarity for investors and operators navigating these diverse jurisdictions.
OTC Trading vs. Exchange Trading: Key Differences
Understanding the distinction between OTC and exchange-based trading is essential for assessing regulatory needs and operational risks.
Over-the-Counter (OTC) Trading
OTC trading involves direct peer-to-peer transactions, often facilitated by brokers or dedicated OTC desks. It’s especially favored for large-volume trades because it avoids market impact and price volatility associated with order book trading.
Advantages:
- Minimal price slippage through pre-negotiated rates
- Enhanced privacy—transactions aren’t publicly recorded
- Flexible settlement options and custom trade sizes
- Ideal for institutional players moving significant capital
Challenges:
- Higher counterparty risk due to lack of centralized clearing
- Reliance on the reputation and solvency of OTC providers
- Limited regulatory oversight in some regions
- Less user-friendly interfaces compared to exchanges
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Exchange-Based Trading
In contrast, exchange trading occurs on centralized platforms where buy and sell orders are matched via an order book.
Advantages:
- High liquidity across major digital assets
- Transparent pricing and real-time market data
- Lower counterparty risk thanks to platform guarantees
- Robust security measures and integrated compliance tools
- User-friendly interfaces with advanced analytics
Challenges:
- Price slippage on large orders
- Mandatory KYC/AML procedures reduce anonymity
- Regulatory restrictions may limit access in certain regions
- Potential for higher fees depending on volume and tier
Ultimately, the choice between OTC and exchange trading depends on transaction size, privacy needs, and regulatory compliance preferences.
Regulatory Frameworks: Hong Kong, Singapore, and the U.S.
Each jurisdiction approaches crypto regulation differently, balancing innovation with investor protection and financial stability.
Hong Kong: Moving Toward Formalized OTC Oversight
Hong Kong’s Securities and Futures Commission (SFC) leads crypto regulation under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO). Virtual Asset Trading Platforms (VATPs) must obtain licenses and adhere to strict compliance standards.
Until recently, OTC businesses—often operating as physical "crypto kiosks"—faced minimal regulation. Anyone could open an OTC shop, creating loopholes for illicit activity. To address this, the Financial Services and the Treasury Bureau (FSTB) launched a public consultation in February 2024 proposing a formal licensing regime for OTC operators.
Key requirements under the proposed framework:
- Physical OTC businesses must operate from approved premises in Hong Kong
- Online operators need a local management office and record-keeping infrastructure
- At least one qualified compliance officer and one AML reporting officer required
- Implementation of robust AML/CFT policies and risk management systems
- Maintenance of detailed transaction records and wallet inventories
Notably, licensed OTC providers will only be allowed to facilitate fiat-to-crypto conversions, not crypto-to-crypto swaps. They’ll also be barred from offering assets not listed on SFC-approved platforms or stablecoins not issued by HKMA-authorized entities—protections aimed at retail investors.
Existing operators will have a six-month transition period to apply for licenses. This move signals Hong Kong’s intent to become a regulated crypto hub in Asia, attracting compliant institutional capital.
👉 Explore how upcoming regulations could shape the future of OTC markets in Asia.
Singapore: Clarity Through the Payment Services Act
Singapore’s Monetary Authority of Singapore (MAS) regulates crypto activities under the Payment Services Act (PSA). Any platform facilitating OTC trades in digital payment tokens (DPTs) falls under this law.
Under PSA, companies providing crypto services must obtain either:
- A Standard Payment Institution (SPI) license (for monthly transaction values up to SGD 3 million)
- Or a Major Payment Institution (MPI) license (unlimited transaction volume)
Regulated activities include:
- Buying/selling DPTs
- Operating crypto exchanges
- Transferring digital assets between addresses
- Referring users to buy/sell crypto
All licensed entities must comply with rigorous AML/CFT protocols, including customer due diligence and transaction monitoring. MAS has also strengthened rules around custody and disclosure, reinforcing its balanced approach: supportive of innovation while prioritizing investor safety.
Recent developments show MAS pushing for greater accountability among DPT service providers. The focus remains on regulatory clarity, risk mitigation, and fostering fintech growth—making Singapore one of the most attractive jurisdictions for compliant crypto firms in APAC.
United States: Fragmented but Evolving Regulation
The U.S. lacks a unified crypto regulator, with oversight split among:
- SEC: Treats certain tokens as securities; enforces registration and disclosure
- CFTC: Regulates crypto as commodities (e.g., Bitcoin futures)
- FinCEN: Requires all crypto businesses to register as Money Services Businesses (MSBs)
- OCC: Provides guidance on bank-crypto relationships
OTC desks and exchanges must implement full KYC/AML programs, file Suspicious Activity Reports (SARs), and maintain audit trails.
A significant upcoming change is California’s Digital Financial Assets Law (DFAL), set to take effect July 1, 2025. DFAL will require companies engaged in digital asset exchange, issuance, or storage to obtain a license from the Department of Financial Protection and Innovation (DFPI)—mirroring New York’s BitLicense regime.
Covered activities include:
- Exchanging or issuing digital financial assets
- Holding electronic precious metals on behalf of clients
- Trading game tokens convertible into real-world value
With DFAL, California joins New York and Louisiana as states establishing dedicated crypto licensing frameworks—a sign of growing state-level regulatory momentum.
Despite complexity and occasional enforcement unpredictability, the U.S. market remains highly attractive due to its depth, liquidity, and technological innovation.
Future Outlook: Where Is OTC Regulation Headed?
Hong Kong
By introducing a formal OTC licensing system, Hong Kong aims to position itself as a regulated gateway for Asian crypto finance. While initial compliance burdens may deter smaller players, the long-term vision supports institutional adoption and cross-border capital flows within a transparent framework.
Singapore
Singapore continues to refine its PSA-based model, emphasizing clarity, security, and innovation. Its proactive stance makes it a preferred destination for global firms seeking a stable regulatory environment without stifling growth.
United States
The U.S. faces challenges from regulatory fragmentation and legal ambiguity, yet its mature financial infrastructure and innovation ecosystem ensure continued relevance. As federal and state regulations converge, the path toward comprehensive oversight becomes clearer—especially post-2025.
Frequently Asked Questions (FAQ)
Q: What is the main advantage of OTC crypto trading?
A: OTC trading allows large transactions without affecting market prices, offering privacy, reduced slippage, and customizable settlement terms.
Q: Are OTC crypto trades legal in Hong Kong?
A: Yes, but new regulations proposed in 2024 will require OTC operators to obtain licenses from Hong Kong Customs, enhancing compliance and investor protection.
Q: Do I need a license to run an OTC desk in Singapore?
A: Yes. Under the Payment Services Act (PSA), any business facilitating crypto trades must hold either a Standard or Major Payment Institution license.
Q: How does the U.S. regulate crypto OTC dealers?
A: OTC operators must register with FinCEN as Money Services Businesses (MSBs) and comply with AML/KYC rules. Some states, like California, are adding additional licensing requirements starting in 2025.
Q: Can I trade any cryptocurrency via OTC in Hong Kong?
A: No. Licensed OTC providers will only be permitted to offer virtual assets listed on SFC-approved platforms and stablecoins issued by HKMA-authorized entities.
Q: Why is regulatory clarity important for OTC markets?
A: Clear rules reduce legal risks, attract institutional investment, prevent fraud, and promote sustainable growth in the digital asset ecosystem.
Conclusion
Hong Kong, Singapore, and the United States represent three distinct models of crypto regulation—each shaping the future of OTC trading in unique ways.
- Hong Kong is building a structured, investor-protected environment to become Asia’s regulated crypto hub.
- Singapore offers regulatory clarity and strong safeguards, making it ideal for compliant innovation.
- The U.S., despite complexity, remains a dominant force due to market depth and technological leadership.
For market participants, understanding these frameworks is crucial for strategic planning. As global regulations mature, adaptability will be key to thriving in the next era of digital finance.
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