Hong Kong licensed Virtual Money exchange, starting OTC next.

Written by: Liu Honglin

A year after 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 actually laying out business in the field of over-the-counter (OTC) trading for virtual currencies.

You might see a scene like this at a street corner in Wan Chai or Causeway Bay in Hong Kong: the store decoration looks like a bank counter, and there is a sign on the wall that says "Digital Asset Exchange." You can walk in to exchange USDT, withdraw BTC, and even help you 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 places that seem like "street-side exchange shops" are strategic partners of compliant licensed platforms, which makes one start to ponder: the on-exchange activities are conducted on the exchange, while off-exchange activities are run as OTC. Is this the dual training version for Hong Kong Web3 entrepreneurs?

If this situation had occurred two years ago, it would have actually been quite surprising. After all, in traditional understanding, once you obtain a license, shouldn't you start operating the matching engine, connecting to clearing and settlement, and maintaining the compliance system? Now, however, one by one, they are going out to do "currency exchange"? It sounds like a bit of a dimensionality reduction attack. But if you really take a look at the current profitability situation of compliant exchanges in Hong Kong, and then consider the current status of capital flow between the mainland and Hong Kong, such an arrangement is actually quite logical, and can even be said to be inevitable.

We have to acknowledge a reality: the main assets and main users of the entire cryptocurrency industry are still largely held in mainland China. Whether they are crypto-native investors, traditional business owners transforming their industries, or even cross-border trade teams doing business in the Middle East, Africa, and Southeast Asia, they are using virtual currencies as a funding channel, hedging against exchange rate risks, and even completing some overseas settlements. In short, the traffic and money are still in the hands of the mainland.

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

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

OTC, or Over-The-Counter, simply refers to a method of trading where buyers and sellers (or intermediaries) complete the two-way conversion of assets and fiat currency directly, without going through a trading matching system. In Hong Kong, such transactions can flexibly meet the demands from mainland China or non-compliant regions on one hand, while on the other hand, the current OTC business has not yet been included in the virtual asset trading platform licensing system, remaining in a "regulatory gray area". In other words, against the backdrop of clear regulatory red lines and strict scrutiny for on-exchange licenses, off-exchange transactions have become a practical outlet to alleviate compliance restrictions and expand operational space.

More importantly, many OTC scenarios are essentially outlets for real market demand. For example, you are a boss in Shenzhen, and in the past, you used US dollars to make payments for goods in the Middle East. Now, with foreign exchange quotas restricted and exchange rates unstable, you choose to convert RMB to USDT and then transfer it out from Hong Kong. Or, if you are an institutional client wanting to buy coins on a licensed exchange in Hong Kong but your account is still delayed in opening, what should you do? You can only first go to OTC to complete the initial currency exchange and then transfer it from the over-the-counter market to the exchange.

At this time, you will find that the OTC behind these compliant exchanges is not a whim, but a natural extension of the industrial chain. If you can't earn trading fees on the exchange, you can only rely on an additional exchange service fee on the exchange, or even a little bit of market-making income. After all, it is common for Hong Kong to open an exchange, and it is common to invest tens of millions of dollars a year, and if you rely on hundreds of institutions to move bricks and sporadic project listing fees, then this account will not be able to hold up for a long time.

As a result, we have seen that there are now many OTC stores like "money changers" in Central, Causeway Bay, and even near the Sheung Wan MTR station entrance in Hong Kong. Their slogans are "safe and convenient", "support Hong Kong dollars, US dollars, telegraphic transfers" and so on. As soon as you enter, he can ask you what currency you want to exchange, where you plan to transfer it to, and even do a targeted transfer service. And these stores are either strategic partners of licensed exchanges, or they are "shadow branches" that have been revitalized from their private resources.

This operational logic has gradually become a common practice: compliance on the exchange and flexibility off the exchange, a two-sided approach. Exchanges smoothly bypass regulatory requirements through third-party cooperation, technical integration, or an "associated 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 a virtual asset OTC service license is in the works, and perhaps in the near future, these exchange shops will also enter the "licensed era."

This is why we are seeing that not only regulatory exchange teams are eyeing this space, but also the old teams that originally conducted USDT transactions in mainland China are looking for offices in Hong Kong, and even establishing shell companies with local names, all to seize this window period that has not yet tightened. Everyone is aware that once the real OTC regulatory system is implemented, the entry barriers and compliance costs will definitely rise. If they do not secure their positions now, when the next round of regulation comes, they will only be washed out.

The development of the virtual asset industry has never been a "black or white" scenario. Each player is trying to find the most comfortable position to survive between compliance and reality, and it is essential to understand what true "compliance dividends" are—not just being able to open a trading platform, but being able to build a system that operates smoothly on top of compliance while also addressing real market demands.

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