Mankiw Research | Overview of Crypto Assets OTC Business Licenses: What are the differences in legal compliance between Hong Kong, the EU, and the USA?

Question

OTC traders, as core participants in the virtual asset market, focus on providing Block Trading platforms for high-net-worth clients, institutional investors, and exchanges. Through customized trading mechanisms, OTC traders can ensure that large-scale trades are executed smoothly without disrupting market prices, while offering clients greater privacy, transaction security, and Liquidity guarantees. According to relevant data, in 2024, the OTC trading volume is expected to increase by 106% year-on-year, reflecting a significant rise in market activity and demand for OTC in the industry. Among this, stablecoins dominate, accounting for about 95% of the trading volume, with an annual growth of 147%. Additionally, from the perspective 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, as the market expands, OTC merchants also face a series of compliance challenges.

OTC business compliance challenges The regulatory framework of the cryptocurrency industry is more lenient 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 the changing legal and regulatory requirements. At the same time, the business model of OTC traders requires them to handle Block Trading, which typically does 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 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 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. In this context, the OTC business license has become particularly crucial. By obtaining a legal license, OTC merchants 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 business licenses However, looking at various countries and regions around the world, the regulatory framework for OTC businesses 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, Attorney Mankun will systematically review the legislative status of these regions and explore their OTC merchant license and respective compliance requirements.

Hong Kong: OTC Trading Regulation Legislation The Financial Services and the Treasury Bureau (FSTB) of Hong Kong released a legislative consultation document on virtual asset over-the-counter (OTC) services in February 2024, proposing the introduction of an OTC merchant license system through 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 a licensing regime for OTC firms through the Anti-Money Laundering and Counter-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 that provide OTC trading services for virtual assets, including OTC dealers, are required to apply for the relevant licenses from the Customs and Excise Department (CCE) and strictly comply with these legal requirements. As of April 2025, the legislation is still in the consultation stage, and the specific implementation details and entry into force are still 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) Licensing requirements mandate OTC traders to implement strict anti-money laundering and customer identification policies to ensure their trading activities are not used for illegal fund flows, money laundering, or financing terrorism. OTC traders must execute risk-based Customer Due Diligence (CDD) procedures, particularly when handling Block Trading, conducting identity verification and transaction monitoring. Each transaction requires customer identification, and suspicious activities must be reported. Compliance document requirements OTC traders 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 traders have taken the necessary steps to comply with relevant anti-money laundering and customer protection regulations. Ongoing regulation and compliance supervision Hong Kong Customs will be responsible for the ongoing supervision of OTC merchants to ensure compliance with all relevant anti-money laundering regulations and to regularly review their compliance. In particular, regarding Block Trading and market transparency, Hong Kong Customs will strengthen compliance oversight of OTC merchants to ensure that their trading activities are legal and transparent.
EU: MiCA legislation The EU's MiCA regulation provides a unified regulatory framework that covers crypto asset service providers, including over-the-counter (OTC) brokers (CASP). Although MiCA does not establish a separate category for 'OTC brokers,' those engaged in the types of crypto services defined by MiCA (such as order execution, trading matching, or asset custody) must register as a CASP. According to this regulation, OTC brokers 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 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 terrorism. OTC traders must execute risk-based customer due diligence (CDD) procedures, particularly during Block Trading, conducting stringent identity verification and transaction monitoring. Specifically, for each transaction, OTC traders need to identify and verify customer identities and report any suspicious activities. Compliance document requirements OTC merchants are required to submit compliance documents to regulatory authorities, including anti-money laundering policies, risk management measures, capital requirements, and other content, to prove that they have taken measures to comply with MiCA requirements. In addition to AML/KYC policies, MiCA also requires OTC merchants to establish an effective risk management framework 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 the trading 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 adhere to market transparency requirements, publish adequate risk disclosures, and avoid causing harm to investors. OTC traders must ensure the transparency of their trading activities to prevent market prices and asset stability from being affected by opaque trading behaviors. Cross-border compliance requirements 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 adopt consistent compliance measures in cross-border transactions, especially concerning anti-money laundering and consumer protection. Due to potentially different legal requirements in 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 requirements for data protection imposed by the EU's GDPR.
United States: Current State of Decentralized Regulation 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 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 operation and the nature of the virtual assets involved. SEC regulation: If a virtual asset traded by an OTC dealer is considered a security, then its trading will be regulated by the U.S. Securities and Exchange Commission (SEC). The SEC relies on the Howe test to determine whether a virtual asset constitutes a security. If a virtual asset is defined as a security, OTC dealers are required to comply with securities laws and may be required to register as a securities broker and be subject to appropriate 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 deemed to be engaged in money services business, they 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 their operations comply with the financial crime prevention requirements in 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 considers certain virtual assets (such as Bitcoin) as commodities, so related futures contracts and derivatives trading will be subject to its oversight. However, at the state level, New York's BitLicense system provides a dedicated regulatory framework for OTC traders. Under the BitLicense system, any company providing virtual currency-related services in New York, including OTC traders, must obtain a BitLicense. The core content of this licensing system includes: Anti-Money Laundering (AML) and Know Your Customer (KYC) requirements ensure that OTC merchants strictly comply with financial crime prevention regulations. Capital adequacy requirements ensure that OTC merchants maintain necessary financial stability during operations. Reports and compliance, OTC traders are required to regularly submit operational and financial reports to regulatory authorities to ensure their activities comply with regulations. Therefore, when OTC traders operate in New York State, they must meet all compliance requirements of the BitLicense. This also means that for OTC traders operating across state lines, they must consider the potential different regulatory requirements of each state in addition to federal-level regulations.

Mankun Lawyer Compliance Advice By comparing the regulatory systems of Hong Kong, the EU, and the United States, we can see significant differences in the OTC merchant licensing systems 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 developed, 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 Block Trading. EU: The MiCA legislation focuses on cross-border compliance and market transparency, especially for OTC traders who need to ensure adherence to the EU's strict regulations on market transparency, investor protection, and consumer rights in a globalized operation. United States: Regulation is decentralized, but focuses on localized management, with regulatory differences across states bringing additional compliance costs for OTC traders operating across state lines. Therefore, given 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 mitigate compliance risks. For example:

Establish a cross-regional compliance team OTC merchants should consider establishing dedicated compliance teams in their main operating regions to gain in-depth understanding and track local regulatory changes. Especially in the United States, where compliance requirements vary by state, setting up local compliance teams can help OTC merchants address the regulatory requirements of specific regions and ensure compliance for interstate operations.
Establish a unified global KYC/AML compliance policy Although the specific requirements vary by region, OTC traders can establish a global uniform Anti-Money Laundering (AML) and Know Your Customer (KYC) compliance framework, which can then be adjusted according to the specific regulations of different regions.
Strengthen Customer Due Diligence (CDD) and Background Checks Implement strict customer due diligence (CDD) procedures globally, especially in regions such as the EU and the US, 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 customers.
Strengthen trading monitoring and compliance review OTC merchants should use advanced trading monitoring systems to track and detect potential market manipulation and price manipulation behaviors in real-time, especially in cases where the transparency of the cryptocurrency market is low. These systems can help OTC merchants ensure the fairness and transparency of Block Trading and ensure compliance with the response mechanisms to market manipulation in various regions.
Regularly conduct cross-border compliance training and audits With the changes in the global regulatory environment, OTC merchants should regularly conduct cross-border compliance training to ensure that employees are aware of the latest regulatory requirements and compliance procedures in different regions. At the same time, regular internal compliance audits should be carried out to assess the effectiveness of existing compliance measures and ensure that operations worldwide comply with local laws and regulations.

/ END. Author of this article: Iris, Shao Jiadian