Off-exchange does not equal illegal, and being licensed does not equal safe.

Written by: Liu Honglin

Stepping back into the Hong Kong Web3 Carnival venue after a year, Lawyer Honglin discovered an interesting phenomenon: several compliant exchanges that have obtained licenses for virtual asset trading platforms in Hong Kong are surprisingly laying out plans for over-the-counter (OTC) trading of virtual currencies.

You might see a scene at a street corner in Wan Chai or Causeway Bay: a storefront that looks like a bank counter, with "Digital Asset Exchange" written on the wall. You can walk in to exchange USDT, withdraw BTC, or even have them help you transfer a bunch of stablecoins into your local bank account in Hong Kong.

You might wonder what this has to do with compliant exchanges. Ironically, many of these seemingly "street-side exchange shops" are strategic partners of licensed platforms, which leads one to ponder: the on-exchange operations are exchanges, while the off-exchange operations are OTC. Is this the dual cultivation version for 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 focusing on matching engines, connecting clearing and settlement, and maintaining compliance systems? Now, it seems they are all going out to do "currency exchange"? It sounds a bit like a dimensionality reduction attack. However, if you really look into the current profitability of compliant exchanges in Hong Kong and examine the status of capital flow between mainland China and Hong Kong, such arrangements actually make sense and can even be seen as inevitable.

We must acknowledge a reality: the main assets and primary users in the entire virtual currency industry are still largely in mainland China. Whether they are crypto-native investors, traditional business owners transitioning to digital assets, or cross-border trade teams doing business in the Middle East, Africa, and Southeast Asia, they are using virtual currencies as a channel for funds, hedging against exchange rate risks, and even completing some overseas settlements. In simple terms, the flow and money are still in the hands of mainland China.

But here’s the problem: compliant exchanges in Hong Kong cannot directly serve mainland residents. Almost all licensed trading platforms explicitly 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. If you claim to be an overseas Chinese, fine, but you must provide overseas identification, a non-mainland phone number, and explain where your money comes from and why you want to buy coins. It seems very compliant, but the thresholds are absurdly high.

So what to do? Exchanges can't just operate without making money. OTC has become an accepted "buffer zone."

OTC, simply put, is 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 flexibly meet the demands from mainland or non-compliant regions, and since OTC business itself is not yet included in the virtual asset trading platform licensing system, it remains in a "regulatory gray area." In other words, in a context where the on-exchange licensing red lines are clear and scrutiny is strict, the off-exchange operations have become a practical outlet to alleviate compliance restrictions and expand operational space.

More critically, many OTC scenarios are essentially outlets for real market demand. For example, if you are a business owner in Shenzhen who used to pay for goods in the Middle East with US dollars, but now face foreign exchange limits 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 has not been opened for a long time, what do you do? You have to first go to OTC to complete the initial currency exchange before transferring from off-exchange to on-exchange.

At this point, you will realize that the OTC operations behind these compliant exchanges are not a sudden idea but a natural extension of the industry chain. If you can't earn trading fees on-exchange, you can only rely on off-exchange to earn a currency exchange service fee or even some market-making revenue. 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, that financial model would have collapsed long ago.

Thus, we see that now in Central, Causeway Bay, and even near the Sheung Wan subway station, there are many OTC shops resembling "exchange shops." Their slogans include "safe and convenient," "supporting HKD, USD, wire transfers," and so on. Once you enter, they can ask you what currency you want to exchange, where you plan to transfer it, and even provide targeted transfer services. These shops are either strategic partners of licensed exchanges or "shadow branches" activated through their private resources.

This operational logic has slowly become a norm: compliance on-exchange, flexibility off-exchange, two sides of the same coin. Exchanges have successfully circumvented regulatory requirements through third-party cooperation, technical integration, or "affiliated but not controlled" structures, while also providing a more controllable entry point for capital flow.

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 in the works, and perhaps in the near future, these exchange shops will also enter the "licensed era."

Thus, we see that not only compliant exchange teams are eyeing this territory, but even the old teams that originally conducted USDT trading in mainland China are scouting for offices in Hong Kong, or 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 barriers and compliance costs will surely rise. If you don't position yourself in advance, when the next round of regulation hits, 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, every player is looking for the most comfortable position to survive, understanding 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 addressing real market demands.

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

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