Written by: Liu Honglin
A year after returning to the Hong Kong Web3 Carnival venue, Lawyer Liu discovered an interesting phenomenon: several compliant exchanges that have obtained virtual asset trading platform licenses in Hong Kong are actually laying out their over-the-counter (OTC) cryptocurrency trading business.
You might encounter a scene on a street corner in Wan Chai or Causeway Bay, Hong Kong: a storefront decorated like a bank counter, with "Digital Asset Exchange" written on the wall. You can walk in to exchange USDT, withdraw BTC, and even have a bunch of stablecoins transferred to your local Hong Kong bank account.
You might wonder what this has to do with compliant exchanges? Surprisingly, many of these seemingly "street exchange shops" are strategic partners of licensed platforms, which makes one ponder: Is this the dual cultivation version of Hong Kong's Web3 business, with exchanges operating on-platform and OTC running off-platform?
This scenario would have been quite surprising two years ago. Traditionally, after obtaining a license, one would focus on matching engines, clearing and settlement, and maintaining a compliance system. Now, they're all going down to do "currency exchange"? It sounds like a downgrade. However, if you truly understand the current profitability of Hong Kong's compliant exchanges and the status of fund flows between mainland China and Hong Kong, such an arrangement becomes logical and even inevitable.
We must acknowledge a reality: the main assets and users of the entire virtual currency industry are still largely controlled by mainland China. Whether it's crypto-native investors, traditional business owners transitioning, or cross-border trade teams doing business in the Middle East, Africa, and Southeast Asia, they use virtual currencies as fund channels, hedge exchange rate risks, and even complete overseas settlements. Simply put, the traffic and money are still in the hands of mainland China.
But here's the problem: Hong Kong's compliant exchanges cannot directly serve mainland residents. Almost all licensed trading platforms explicitly state in their legal documents that they do not serve Chinese mainland residents, and many users are blocked at the first step of KYC. If you claim to be an overseas Chinese, you need to provide an overseas ID, a non-mainland phone number, and explain where the money comes from and why you want to buy cryptocurrency. It looks compliant but has an incredibly high threshold.
So what can they do? Exchanges can't just operate without making money. OTC has become an acceptable "buffer zone".
OTC, simply put, is a direct asset and fiat currency conversion between buyers and sellers (or intermediary matchmakers) without using a trading matching system. In Hong Kong, such transactions can more flexibly connect demands from mainland China or non-compliant regions. Moreover, OTC services are currently not included in the virtual asset trading platform license system and remain in a "not yet regulated" gray area. In other words, under the clear red lines and strict review of on-platform licenses, off-platform becomes a practical outlet to alleviate compliance restrictions and expand operational space.
More critically, many OTC scenarios are essentially outlets for real market demands. For example, if you're a Shenzhen boss who used to pay for goods in the Middle East with US dollars, but now face limited foreign exchange quotas and unstable exchange rates, you might choose to convert RMB to USDT and send it out from Hong Kong. Or if you're an institutional client wanting to buy cryptocurrency on a licensed Hong Kong exchange but unable to open an account, you can only complete the first currency exchange through OTC and then transfer it to the on-platform account.
You'll realize that these compliant exchanges doing OTC is not a sudden whim, but a natural extension of the industry chain. If you can't earn transaction fees on-platform, you can only earn more from off-platform exchange service fees or even take some market-making income. After all, running an exchange in Hong Kong involves millions in annual investment. If you're relying on a few hundred institutional arbitrage trades and sporadic project listing fees, the business would collapse long ago.
So now we see many OTC storefronts in Central, Causeway Bay, and even near Sheung Wan MTR station in Hong Kong. Their slogans are "safe and convenient", "supporting HKD, USD, telegraphic transfer" and so on. When you enter, they can ask what currency you want to exchange, where you want to transfer it, and even provide targeted transfer services. These stores are either strategic partners of licensed exchanges or their "shadow branches" activated through private resources.
This operational logic has gradually become the industry norm: on-platform compliance, off-platform flexibility, two sides of the same coin. Exchanges successfully bypass regulatory requirements through third-party cooperation, technical access, or "associated but not controlled" structures, while also providing a more controllable entry point for fund flows.
However, this market is not without risks. Since the second half of 2024, Hong Kong regulatory authorities have noticed the rapid expansion of the OTC market and have signaled in multiple occasions that they will "establish a separate regulatory framework for OTC services in the future". It is understood that a draft license for virtual asset OTC services is being conceived, and perhaps in the near future, these exchange shops will also enter the "licensed era".
That's why we see not only compliant exchange teams eyeing this market, but even old teams that used to trade USDT in mainland China are looking for offices in Hong Kong, even setting up shell companies under local names, just to seize this not-yet-tightened window period. Everyone knows that when the real OTC regulatory system is implemented, entry barriers and compliance costs will definitely increase. If they don't position themselves in advance, they'll be washed out when the next wave of regulation arrives.
The development of the virtual asset industry has never been a "black and white" script. Between compliance and reality, every player is finding the most comfortable position to survive, understanding what true "compliance dividends" are - not just being able to open a trading platform, but building a system that can run business and touch real market demands on top of compliance.
OTC does not equal illegal, and being licensed does not equal safety. What has always been important is the design of the path and the rhythm of execution.
