Hong Kong licensed Virtual Money exchange, starting OTC next.

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, Hong Kong: a shop that looks like a bank counter, with "Digital Asset Exchange" written on the wall. You can walk in to exchange USDT, withdraw BTC, and even get help transferring 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 wonder: what happens in the exchange is trading, and outside the exchange is OTC; could this be the dual cultivation version of Hong Kong Web3 entrepreneurs?

If this situation had occurred two years ago, it would have been quite surprising. After all, in traditional understanding, once you obtain a license, shouldn't you be running the matching engine, connecting to clearing and settlement, and maintaining the compliance system? Now it seems like everyone is diving into "currency exchange" instead? It sounds a bit like a dimensionality reduction attack. However, if you really look into the current profit status of compliant exchanges in Hong Kong, and then consider the current state of capital flow between the mainland and Hong Kong, such an arrangement actually makes sense, and can even be said to be inevitable.

We must acknowledge a reality: the main assets and users in the entire virtual currency industry are still largely in mainland China. Whether it's crypto-native investors, traditional industry bosses transitioning into this space, 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, to hedge against exchange rate risks, and even to complete some overseas settlements. In simple terms, both traffic and money are still in the hands of mainland China.

But the problem is that compliant exchanges in Hong Kong cannot directly serve residents from mainland China. Almost all licensed trading platforms clearly state in their legal documents that "they 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 need to provide overseas identification, a non-mainland phone number, and also explain where your money comes from and why you want to buy coins. It seems very compliant, but in reality, the threshold is absurdly high.

What should we do then? The exchange can't just run idle without making money, right? 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 more flexibly meet the demands from mainland or non-compliant regions, and on the other hand, since the OTC business itself is not yet incorporated into the virtual asset trading platform licensing system, it remains in a "regulatory gray area" where supervision has not yet been implemented. In other words, against the backdrop of clearly defined red lines and strict review for on-site licenses, off-site trading has become a practical outlet to alleviate compliance restrictions and expand operational space.

More importantly, many OTC scenarios are essentially an outlet for real market demand. For example, if you are a boss in Shenzhen who used to pay for goods in USD to the Middle East, but now face restrictions on 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 are an institutional client wanting to buy coins on a licensed exchange in Hong Kong, but your account is still not set up, what can you do? You have to complete the first coin exchange in OTC and then transfer it from off-exchange to on-exchange.

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

We can see that now in Hong Kong's Central, Causeway Bay, and even near the Sheung Wan subway station, there are quite a few OTC stores similar to "exchange shops." Their slogans are "safe and convenient," "supporting HKD, USD, wire transfers," 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 directed transfer services. These stores are either strategic partners of licensed exchanges or "shadow branches" that they have privately activated from their resources.

This operational logic has gradually become a common practice: compliance in the market, flexibility outside the market, two sides of the same coin. Exchanges have successfully circumvented regulatory requirements through third-party collaborations, technical integrations, or "associated but not controlled" frameworks, while also providing a more controllable entry point for capital flows.

However, 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 virtual asset OTC service licenses is currently being prepared, 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 area, but even the old teams that originally conducted USDT transactions in the mainland are looking for offices in Hong Kong, and even setting up shell companies under local names, all to seize this unregulated window period. Everyone knows that once the real OTC regulatory system is implemented, the entry thresholds and compliance costs will definitely rise. If you don’t secure your position now, when the next round of regulation comes, you will only be washed out.

The development of the virtual asset industry has never been a "black or white" script. Between compliance and reality, each player is finding the most comfortable position to survive, and understanding what true "compliance dividends" really 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 is important has always been the design of the path and the rhythm of execution.