Article Authors: Iris, Shao Jiaodine
OTC merchants, as core participants in the virtual asset market, focus on providing large-scale trading platforms for high-net-worth clients, institutional investors, and exchanges. Through customized trading mechanisms, OTC merchants can ensure large-scale transactions are completed smoothly without disrupting market prices, while providing customers with higher privacy, trading security, and liquidity guarantees.
Related data shows that in 2024, OTC trading volume increased by 106% year-on-year, reflecting a significant rise in market activity and industry demand for OTC services. Among these, stablecoins dominated—accounting for approximately 95% of trading volume, with annual trading volume growing by 147%. Additionally, in terms of market distribution, Europe leads in 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 Merchant Compliance Challenges
The crypto industry has a relatively loose regulatory framework compared to traditional financial markets, creating compliance uncertainties for OTC merchants across different global regions. Although the global regulatory environment is gradually tightening, especially in areas like anti-money laundering (AML) and know-your-customer (KYC), OTC merchants still need to address changing legal and regulatory requirements.
Simultaneously, the business model of OTC merchants requires handling large-scale transactions, which often lack public market prices, increasing the risks of market manipulation and information asymmetry. Without transparent pricing, OTC merchants need to take additional measures to ensure transaction fairness and price stability, avoiding artificial market influences.
Moreover, OTC merchants often engage in cross-border transactions, thus facing regulatory requirements from different jurisdictions. Variations in regional regulatory standards mean OTC merchants must continuously adjust their compliance strategies to ensure their business complies with legal provisions in different markets. Particularly in data protection and privacy policies, the complexity of cross-border compliance significantly increases OTC merchants' compliance risks.
In this context, OTC merchant licenses become especially critical.
By obtaining legal licenses, OTC merchants can not only ensure compliance with local legal requirements but also enhance their credibility and market competitiveness in an increasingly strict market environment.
SEC Regulation: If OTC traded virtual assets are considered securities, their trading will be regulated by the U.S. Securities and Exchange Commission (SEC). The SEC uses the Howey Test to determine whether a virtual asset constitutes a security. If a virtual asset is defined as a security, OTC traders must comply with securities laws, potentially requiring registration as a securities broker and meeting corresponding regulatory requirements. Assets not meeting the securities definition are not subject to SEC regulation.
Financial Crimes Enforcement Network (FinCEN): If OTC traders are deemed to be engaged in money services business, they must register with FinCEN and comply with Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT) regulations. OTC traders must fulfill suspicious transaction reporting obligations and implement Customer Due Diligence (CDD) procedures to ensure their business meets U.S. financial crime prevention requirements.
CFTC Regulation: For OTC traders involving virtual asset futures and derivatives, the Commodity Futures Trading Commission (CFTC) may intervene in regulation. CFTC considers certain virtual assets (such as Bit) as commodities, thus regulating related futures contracts and derivative transactions.
However, at the state level, New York's BitLicense system provides a specific 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.
Anti-Money Laundering (AML) and Know Your Customer (KYC) requirements to ensure OTC traders strictly comply with financial crime prevention regulations.
Capital adequacy requirements to ensure OTC traders maintain necessary financial stability during operations.
Reporting and compliance, with OTC traders required to regularly submit operational and financial reports to regulatory authorities to ensure their activities comply with regulations.
Therefore, OTC traders operating in New York must meet all BitLicense compliance requirements. This also means that for interstate OTC traders, they must consider potential different regulatory requirements across states in addition to federal-level regulations.
