What really goes on at a crypto OTC desk? – Cointelegraph Magazine

Over-the-counter or OTC trading refers to any trading that is not conducted through an automated exchange. What exactly is OTC trading? Who does it and why? To learn more about what an OTC table is and how these “under the radar” exchanges work, Magazine spoke with some experts to get the scoop.

The most popular concept of OTC trading revolves around massive off-market offerings, such as when companies like MicroStrategy make multimillion-dollar purchases using OTC tables run by companies like Coinbase or Kraken.

OTC trading is not, however, the exclusive domain of the rich, as it can also refer to peer-to-peer platforms such as LocalBitcoins, which has been helping individuals trade BTC both in person and by bank transfer since 2013. Even some cryptocurrencies ATMs can be classified as OTC trading, as these transactions are not always clarified in an exchange. Between these two are the medium-sized regional OTC tables, which facilitate the purchase and sale of crypto by both individuals and companies.

What really happens behind the scenes at an OTC table?

Go without a prescription

Why do people look for OTC deals in the first place when existing exchanges like Binance and Coinbase offer easy access ramps?

Amin Rad, CEO of Dubai-based OTC Crypto Desk broker, explains that this way of trading offers advantages for some people. He says there are only “a few ways to convert fiat currency into cryptocurrency,” noting three:

1. Credit and debit cards are a popular way for new users to buy cryptocurrency through an exchange, but they come with high rates of up to 10%. However, many banks and credit card issuers still consider such transactions suspicious, blocking or even closing accounts after learning about the nature of the transactions. On the trading side, credit cards from certain countries, including Russia, Kazakhstan, and Ukraine, are automatically declined. “An additional limitation is that users can’t sell cryptocurrencies this way, just buy them,” adds Rad, as it is usually impossible to “withdraw” money on a credit card.

2. “The second channel is the purchase by bank transfer,” he says, which consists of sending fiat to the bank account of a stock exchange. Rad finds this problematic because many banks, in some countries more than others, do not want to associate with cryptocurrency or have their customers exchange it. “When people buy cryptocurrencies by bank transfer, they often hide the real purpose of their transfer to prevent their bank account from being closed.”He says, with his views probably more applicable to his own region, the United Arab Emirates. [Editor’s note: Don’t lie to your bank lest you end up like Peter McCormack.]

Banks that tolerate transfers to cryptocurrency exchanges can still involve their compliance teams in asking detailed questions about the exact destination of funds and the rationale behind cryptocurrency purchases. And when transfers are made, it can take several days. One might try to transfer money to an exchange on Monday to buy BTC at $ 30,000, only to see it rise to $ 40,000 before the money arrives on Thursday.

3. OTC is the third method, which allows buyers and sellers to trade directly or through a trading table like the one operated by Rad. No credit cards are involved, and banks cannot easily determine which funds are sent to them to be used for cryptocurrency. With instant confirmation of receipt, you don’t have to wait days and potentially miss an opportunity.

Amin Rad
Rad in your Dubai office.

“A major driver of OTC is that it allows a buyer to deal with larger amounts of cryptocurrencies, such as 100 BTC from a seller at an agreed price, compared to buying through an exchange,” explains Jerry Tan, OTC payment manager in Singapore. based exchange XToperating an OTC table.

From the perspective of whales, like funds that trade large amounts of cryptocurrency, OTC tables are valuable because of their ability to conduct large transactions without moving the market against them. This effect is known as “slippage” and occurs when large-scale buying causes prices to rise immediately before the target amount of cryptocurrency is bought, while selling causes it to fall before all is sold.

“It is likely that a single seller in the order book will not be able to make transactions with an amount as large as 100 BTC. Therefore, you will have to buy from several sellers at higher prices. This is where the desired initial price slip occurs.

Despite the many reasons for participating in OTC trading, there are risks, according to Victor Olmo, a fund partner at NewTribe Capital. “One of the most significant is counterparty risk: the possibility of default by the other party prior to the performance or expiration of a contract,” he explains. Scams are another common scam, many of which have been described in a recent post Article Journeys in Blockchain profiling Rad and its OTC Crypto Desk exchange.

Amin Rad
Rad told his story and gave tips on how to prevent cryptographic fraud in a recent Journeys in Blockchain article.

Who uses OTC exchanges like Crypto Desk?

Although Rad’s operations are local to the UAE, he says customers often fall into two main categories: local cryptocurrency buyers tend to represent “traditional finance” that diversifies into the industry, while expatriate sellers already own cryptocurrencies. and they need to be exchanged for local currency. “to buy real estate, cars and pay for living in the UAE.”

These expenses can even include the purchase of real estate, in which case it is quite understandable that neither sellers nor buyers want to risk going through a traditional exchange and bank transfers, as banks can block, freeze or question large amounts being withdrawn directly from the crypto. exchanges. Although its daily turnover is in the billions of millions, it usually consists of several much smaller OTC agreements that are not above the means of fairly normal people, many of whom do not want to risk problems with their banks, which can block transfers. . between cryptographic exchanges.

Different regulations

The Dubai-based Crypto Desk is an example of brokerage with a comparatively more lenient regulatory threshold, as customers only need to prove their identity and sign a statement letter stating that they are not involved in terrorism, money laundering or trade. with sanctioned countries. “Once we obtain the KYC and CT / AML Statement Letter, we protect ourselves from almost all legal complications that may arise due to the risky nature of financial transactions. However, we can request additional documentation at our discretion if we consider the transaction to be high risk, “says Rad, adding that he is not required to report transactions, regardless of size, but keeps records indefinitely.

When it comes to other OTC tables, regulations tend to live up to normal exchanges in terms of KYC identity requirements, although they are usually less controlled.

According to Panu Peltola, head of compliance at Finland-based LocalBitcoins, most regions of the world are tightening regulations. He cites that Asia has some of the “most advanced” regulations, followed by North America.

“The EU is only planning for wider regulation,” he said. or a payment provider.

“Global policymakers have taken note of rising adoption volumes and rates and are currently balancing innovation, growth and risk.”

In the United States, all transactions in excess of $ 10,000 involving cash must be reported separately to the Inland Revenue Service, regardless of whether an individual or a financial institution is receiving the money. This form requires complete personal information of who received the money. Although only a minority of OTC agreements involve physical money, this $ 10,000 line, similar to the € 1,000 limit proposed by the EU, also marks the upper limit after which US financial institutions. UU. they must report electronic money transfers. The real values ​​of these sums are noticeably smaller due to compound inflation.

When money changes hands, the IRS wants to know all about it. Source: IRS

The regulatory landscape in Asia, which has many more countries and lacks supranational centralized decision-making bodies such as the EU, seems more fragmented and difficult to describe, as each country has its own existing and forthcoming regulatory procedures. Mainland China, a country with strict capital controls, is perhaps the most restrictive, with its ambition to completely ban trade and mining. In October 2021, Cointelegraph spoke with Henri Arslanian, PwC’s cryptographic leader and former chairman of the Hong Kong FinTech Association, about a “flood” of OTC brick-and-mortar stores.many of which are located in tourist areas to cater to visitors to the mainland.

“It can be assumed that if mainland Chinese tourists visit Hong Kong, nothing will stop them from buying cryptocurrencies in these OTC stores.”

But even Hong Kong, once considered one of the most financially open in the world, is on the verge of banning the retail trade of cryptocurrency, which would theoretically include OTC, probably by sending OTC stores clandestinely.

Singapore has recently introduced stricter measures, according to XT Tan. “Companies wishing to operate cryptocurrency and OTC trading services for Singaporeans have to obtain a license from the Payment Services Act,” he explains, adding that exchanges without a PSA license cannot offer services to Singaporeans. In addition, all Bitcoin ATMs on the island have been ordered to close earlier this year.

Talk about money

So how do OTC tables make money? With spread, in a way comparable to normal exchanges. Although popular exchanges can charge 0.25% on transactions, it is common for OTC tables to have a commission well in excess of 1%. In 2017, 2% to 3% margins were common, says Rad.

Basically, an OTC table works well by combining buyers and sellers or fulfilling orders automatically from your own liquidity fund, the former taking less overhead and risks for the exchange and the latter allowing for instant transactions. “That’s why customers prefer to deal with me,” Rad says of his desk’s advantage of having its own fund of funds that allow for reliable transactions.

OTC tables
OTC tables offer a way to prevent slippage in exchanges.

Another differentiator between the tables is whether they exchange fiat for cryptocurrencies like Bitcoin or Ether or just for stable currencies like USDT or USDC. In recent times, there has been a trend towards stable currencies because they give buyers more flexibility to switch to more volatile cryptocurrencies when they see fit. Some exchanges, such as Rad’s Crypto Desk, deal exclusively with stable currencies, further reducing the risks of maintaining a liquidity pool.

Rad is confident that the OTC market will flourish, both among retail and institutional customers, due to its more direct and intimate nature compared to larger exchanges. For many, person-to-person trading is more convenient than sending money to an overseas exchange, especially when it comes to making large one-time transactions.

“Local [OTC] Exchanges will control local markets because they have a better understanding of their own market: they have better compliance solutions and better licensing solutions. “

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