Hong Kong licensed Virtual Money exchange, starting OTC next.

Over-the-counter does not equal illegal, and being licensed does not equal safe.

Written by: Liu Honglin

A year later, stepping into the Hong Kong Web3 Carnival venue again, Lawyer Honglin discovered an interesting phenomenon: several compliant exchanges that have already obtained virtual asset trading platform licenses in Hong Kong are surprisingly laying out their business in the area of over-the-counter (OTC) trading of virtual currencies.

You might see a scene like this at a street corner in Wan Chai or Causeway Bay in Hong Kong: the shop's decor looks like a bank counter, and the wall says "Digital Asset Exchange". You can walk in to exchange USDT, withdraw BTC, and even have them transfer a bunch of stablecoins into your local bank account in Hong Kong.

What does this have to do with compliant exchanges? It just so happens that many of these seemingly "street-side exchange shops" are strategic partners of compliant licensed platforms, which makes one start to ponder: the on-exchange activities are done by the exchanges, while the off-exchange activities are run by OTC. Could this be the dual cultivation version of Hong Kong Web3 business people?

Two years ago, this situation would have been quite surprising. After all, in traditional understanding, once you obtain a license, you should be running matching engines, connecting to clearing and settlement, and maintaining compliance systems, right? Now, on the contrary, everyone is going down to do "coin swapping"? It sounds a bit like a dimensionality reduction attack. But if you really take a look at the current profit situation of compliant exchanges in Hong Kong, and then observe the current state of capital flow between the mainland and Hong Kong, such an arrangement actually makes perfect sense, and can even be said to be inevitable.

We have to acknowledge a reality: the main assets and primary users in the entire virtual currency industry are still largely held in mainland China. Whether they are native cryptocurrency investors, traditional business owners transitioning to this space, or even cross-border trade teams doing business in the Middle East, Africa, and Southeast Asia, they are using virtual currency for funding channels, hedging exchange rate risks, and even completing some offshore settlements. In simple terms, the traffic and money are still in the hands of mainland China.

But the problem arises: compliant exchanges in Hong Kong cannot directly serve residents from mainland China. Almost all licensed trading platforms clearly state in their legal documents that "services are not provided to residents of mainland China." In fact, many users are blocked at the first step of KYC during registration. You say you are an overseas Chinese, fine, but you need to provide overseas identification, a non-mainland phone number, and be able to explain where your money comes from and why you want to buy coins. It seems very compliant, but in reality, the thresholds are absurdly high.

What should we do then? The exchange can't just run idle without making money. OTC has become the "buffer zone" that everyone can accept.

OTC, simply put, refers to the direct conversion of assets and fiat currency between buyers and sellers (or intermediaries) without going through a trading matching system. In Hong Kong, such transactions can flexibly meet the demands from mainland or non-compliant regions on one hand, and on the other hand, since OTC businesses are not currently included in the virtual asset trading platform licensing system, they remain in a "regulation yet to be implemented" gray area. In other words, in a context where the licensing red lines in the on-exchange environment are clear and the scrutiny is strict, the off-exchange becomes a practical outlet to alleviate compliance restrictions and expand operational space.

Moreover, many OTC scenarios are essentially an outlet for real market demand. For example, if you are a boss in Shenzhen, in the past you would use US dollars to pay for goods in the Middle East, but now with foreign exchange limits and unstable exchange rates, you choose to convert RMB to USDT and go out from Hong Kong. Or if you are an institutional client who wants to buy coins at a licensed exchange in Hong Kong, but your account has not been opened for a long time, what can you do? You can only go to OTC to complete your first currency exchange before transferring from the over-the-counter market to the on-exchange market.

At this point, you will realize that the OTC operations behind these compliant exchanges are not a spur-of-the-moment idea, but a natural extension of the industry chain. If you can't rely on earning trading fees on the exchange, then you can only rely on earning some exchange service fees off the exchange, or even a bit from market-making profits. After all, opening an exchange in Hong Kong typically requires an annual investment of tens of millions, and if you rely on a few hundred institutions for arbitrage and sporadic project listing fees, this account would have collapsed long ago.

So we see that now in Central, Causeway Bay, and even near the Sheung Wan subway station in Hong Kong, there have emerged quite a few OTC stores similar to "exchange shops." Their slogans are "safe and convenient," "supporting HKD, USD, wire transfer," and so on. Once you enter, they will ask you what currency you want to exchange, where you plan to transfer it to, and they can even provide targeted transfer services. These stores are either strategic partners of licensed exchanges or "shadow branches" created from their private resource mobilization.

This kind of operational logic has gradually become the norm: compliance on the exchange and flexibility off the exchange, a dual approach. The exchange has successfully circumvented regulatory requirements through third-party cooperation, technical integration, or a "related but not controlled" structure, while also providing a more controllable entry point for capital flow.

But this market is not without risks. Since the second half of 2024, Hong Kong regulators have noticed the rapid expansion of the OTC market and have signaled on multiple occasions that "a separate regulatory framework for OTC services will be established in the future." It is understood that a draft for the virtual asset OTC service license is in the works, and perhaps in the near future, these exchange shops will also enter the "licensed era."

That's why we see that not only the compliance exchange teams are eyeing this territory, but also the old teams that originally conducted USDT trading in the mainland are looking for offices in Hong Kong. Some are even setting up shell companies under local names just to seize this still loose window period. Everyone knows that once the real OTC regulatory system is implemented, the entry barriers and compliance costs will definitely rise. If you don't position yourself in advance, when the next round of regulations comes, you'll only be washed out.

The development of the virtual asset industry has never been a "black and white" script. Between compliance and reality, every player is looking for the most comfortable position to survive, and it is essential to understand what truly constitutes "compliance dividends"—not just being able to open a trading platform, but being able to build a system that operates smoothly on top of compliance and can connect with real market demands.

Over-the-counter does not equal illegal, and being licensed does not equal safe. What matters is always the design of the path and the rhythm of execution.