What is OTC in Crypto and Does it Require a Special License?

The abbreviation OTC stands for Over-the-Counter, which means special trading/exchange service for institutional investors, which allows the purchase of investment assets (e.g. stocks) or cryptocurrencies, bypassing the standard exchange/marketplace procedure. Based on Cointelegraph review “most popular conception of OTC trading revolves around massive off-market deals, like when companies such as MicroStrategy make multi million-dollar purchases using OTC desks run by Coinbase or Kraken.”

Main attributes for crypto OTC deals

Although, as we said above, an OTC exchange involves an exchange outside of an exchange or exchange stack, from an AML perspective, it's the amount of the transaction that matters - it's usually spelled out on these companies' websites as an exchange above $50,000 dollars.

African crypto exchange Yellow Card in its review divides two different OTC trading markets: Principal OTC trading (trading with own funds of principal) and Agency OTC Trading (using 3rd party funds).

According to provided research of different OTC desks we may classify them in 3 large groups by their business activity:

-OTC desks owned by crypto platforms

-Online OTC desks

-Offline OTC desks

Which jurisdictions large cryptoplatforms use for OTC exchange?

Crypto.com has described companies, which it is using for OTC operations: for Canadian and US users it’s FORIS DAX (registered in Canada) and for all other countries - CRO DAX Limited registered on Cayman Islands.

In the Kraken user agreement we have no information which license is used for OTC trading. However in the list of companies in Annex F there is information that one of these licensed isn’t used for OTC. So probably it means that other companies in the list CAN offer OTC desk and 2 main companies which offer any Kraken services to EEA citizens - are registered in BVA.

According Binance we have no details which entities does it especially use for OTC deals exactly. However, at least it has 1 company having “OTC” in its title - FiveWest OTC Desk (Pty) Limited registered in South Africa.

Coinbase ассording to information on its website provides OTC services through special platform for institutional investors - Coinbase Exchange (previously Coinbase Prime). Operations are provided by 2 licensed entities - Coinbase Inc (USA) and Coinbase Custody International Limited (Ireland).

Bitstamp exchange has launched OTC desk in 2022, it has no 3rd party OTC provider with amount of orders between $50,000 - $500,000. Main companies providing services are registered on BVA, Luxembourhg, UK.

Bybit provides OTC trading for crypto - USDT trading services (no fiat exchange) with maximum amount - $3,8 mln USDT per 1 transction. These and other services on Bybit website are provided by the company Bybit Fintech Limited registered in the UK in April 2023. Interestingly, on this platform, OTC is simply a sub-species of P2P trading for large sums and the platform acts as an agent for this exchange. The OTC desk on Kucoin and MEXC is organized in a similar way.

OTC desk Gate exchange - minimal amount for 1 order is $200,000 and it also works through p2p agent scheme. Bitfinex also provides an agent scheme and abilty to trade instantly with partner OTC trader - Bill Brindise.

Yellow Card has OTC desks in the following counties: Ghana, Uganda, Cameroon and South Africa.

Other OTC providers

Also we’ve observed some online platforms promoting themselves as special OTC platforms and operating in the following jurisdictions:

• ZondaCrypto (Switzerland, Estonia, Poland, Slovakia)
• Encryptus (Australia, UAE, Estonia )
• Bitcoin Reserve (Estonia)
• Coinspaid (Estonia, Lithuania, Poland)
• HashKey (Japan, HonkKong)
• Enigma (United Kingdom)
• Merkeleon (Austria)
• Coinsfera (UAE)
• FalconX (USA, Malta, United Kingdom)
• CoinMotion (Finland)
• Independent Reserves (Australia, Singapore)

Offline OTC exchange

In this article we have gathered more information about OTC transactions that take place online, but they are also conducted offline - for cash or non-cash payment.

The most information about legal offline exchanges that conduct transactions for these amounts in such jurisdictions as Hong Kong and UAE. Exchanges operating there legally also position themselves as platforms for OTC transactions. Some OTC exchanges operating in Hong Kong are collected in this list provided on Bitget's website.

In the future, it would be interesting to study what percentage of exchanges are not only online OTC in countries where crypto is regulated, but also in countries with weak regulation - e.g. Armenia, Moldova, Russia, Turkey. In many countries of the world there are no clear AML requirements for the exchange of cryptocurrencies. Because of this, gray exchange for large amounts is actively developed in them. This is an important factor that strongly influences the global cryptocurrency market.

Licensing of OTC desks

Basic approach that in most jurisdictions there is no OTC trading license. This type of activity is regulated as a standard crypto exchange or currency exchange approach. The vast majority of existing OTC desks operate under a VASP license as online platforms and cryptocurrency exchange companies. The fact that transactions are conducted in OTC format does not affect the required type of license, only imposes additional AML requirements.

In some cases, they may operate as brokers or offline exchanges (in countries where offline exchangers require a different type of license than VASPs).

Conclusion

The regulation of OTC exchange and its separation into a separate type of cryptocurrency transactions is relatively recent and is still in the formation stage. Based on our research we may conclude the following facts about OTC exchange:

• You need a VASP license to provide OTC exchange
• List of most popular jurisdictions for OTC exchange mostly matches the list of jurisdictions with the best regulation of cryptocurrencies and VASP licensing procedures
• Agency OTC does not seem to require any special licensing, while standard OTC using the company's own funds necessarily requires a VASP or broker license
• The same requirements and restrictions apply to the regulation of OTC exchanges as to regular exchanges from an AML perspective. However, in some cases there may be additional compliance requirements as for online exchange of large sums of money
• In some jurisdictions (e.g. USA) you must have institutional investor status to access OTC exchange.

This research is not the truth in the last instance, we have only presented the facts that we managed to establish, if you found any inaccuracies or you have your own opinion - feel free to write me on Twitter or Telegram.