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

Cointelegraph Magazine

OTC or OTC refers to any transaction that is not conducted through an automated exchange. What exactly is over-the-counter trading? Who did it and why? To learn more about what an OTC desk is and how these “secret” exchanges work, the magazine interviewed some insiders for the scoop.

The most popular OTC concept revolves around large-scale OTC transactions, where companies like MicroStrategy use OTC desks run by companies like Coinbase or Kraken to make multi-million dollar purchases.

However, OTC trading is not the exclusive domain of the wealthy, as it can also point to peer-to-peer platforms like LocalBitcoins, which has been helping individuals trade BTC through face-to-face and bank transfers since 2013. Even some cryptocurrency ATMs can be classified as OTC because these transactions are not always cleared on exchanges. In between are mid-sized regional OTC desks that facilitate the purchase and sale of cryptocurrencies by individuals and companies.

What’s going on behind the scenes at the OTC desk?

go to the counter

Why would people seek OTC trading in the first place when existing exchanges like Binance and Coinbase offer easy on-ramp to fiat?

Amin Rad, CEO of Dubai-based OTC broker Crypto Desk, explained that this type of trading offers an advantage to some. He said there are only “a few ways to convert fiat to crypto,” and highlighted three:

1. Credit and debit cards are a popular way for new users to buy cryptocurrencies through exchanges, but they have a fee of up to 10%. However, many banks and credit card issuers still regard such transactions as suspicious, lock or even close accounts after understanding the nature of the transactions. On the exchange side, credit cards from certain countries — including Russia, Kazakhstan, and Ukraine — are automatically declined. “A further limitation is that users cannot sell cryptocurrency in this way, only buy it,” Ladd added, as it is often impossible to “withdraw” money to a credit card.

2. “The second channel is buying via bank transfer,” he said, which involves sending fiat currency to an exchange’s bank account. Rad sees this as problematic because in certain countries, many banks do not want to be associated with cryptocurrencies, nor do they want their customers to transact. “If you want to make a bank transfer, 99 percent of the time you have to lie to the bank or they’ll close the account,” he said, adding that his point probably applies best in his region, United Arab Emirates Emirates. [Editor’s note: Don’t lie to your bank lest you end up like Peter McCormack.]

Banks that do tolerate transfers to cryptocurrency exchanges may still involve their compliance teams to ask detailed questions about the exact destination of the funds and the reasons behind cryptocurrency purchases. When transfers do go through, they can take a few days. Someone might try to wire money to an exchange on Monday to buy BTC for $30,000, only to see Bitcoin rise to $40,000 before the money arrives on Thursday.

3. OTC is a third method that allows buyers and sellers to trade directly or through a trading desk operated by Rad. No credit cards are involved, and banks cannot easily determine whether funds sent to them are destined for cryptocurrency. By confirming receipt immediately, there is no need to wait days and potentially miss out.

amin rad
Ladd in his Dubai office.

Jerry Tan, OTC Payments Manager in Singapore, explained: “One of the big drivers of OTC compared to buying through exchanges is that it allows buyers to process larger amounts of cryptocurrency, such as 100 BTC, from one seller at an agreed-upon price. coin.” based on exchange XTwhich operates an OTC service desk.

From a whale’s perspective, such as funds that deal with large amounts of cryptocurrencies, OTC desks are valuable because they are able to make large trades without turning the market against them. This effect, known as “slippage,” occurs when large-scale buying causes the price to rise immediately before the target amount of cryptocurrency is bought, and selling causes the price to fall before it is all sold.

“It is very likely that a single seller in the order book cannot trade an amount as large as 100 BTC. So you will need to buy from multiple sellers at a higher price. This is where you initially expect price slippage to occur.”

Fund partner Victor Olmo said that while there are many reasons to engage in OTC deals, there are risks. new tribal capital“One of the most important risks is counterparty risk – the possibility that the other party defaults before the contract is fulfilled or expired,” he explained.Scams are another common trap, many of which have been Blockchain Article Tour Analysis of Rad and his Crypto Desk OTC exchange.

amin rad
Rad tells his story and offers tips for avoiding crypto scams in a recent Blockchain Journey article.

Who uses OTC platforms like Crypto Desk?

Although Rad operates locally in the UAE, he says clients tend to fall into two broad categories: local buyers of cryptocurrencies tend to represent “traditional finance” entering the industry, while expat sellers already hold cryptocurrencies and need to exchange them for local currency “To buy real estate, cars and pay living expenses in the UAE.”

These fees may even include the purchase of real property, in which case it is entirely understandable that neither seller nor buyer would want to risk going through traditional exchanges and bank transfers, as banks may block, freeze or question direct withdrawals from cryptocurrencies exchange of large sums of money. Although his daily turnover is in the millions, it tends to consist of several much smaller over-the-counter transactions that are not beyond the capabilities of fairly normal people – many of whom don’t want to risk trouble with the banks, This could prevent transfers between cryptocurrency exchanges.

different regulations

Dubai-based Crypto Desk is an example of a brokerage firm with a lower regulatory threshold, as clients only need to identify themselves and sign a declaration letter stating that they are not involved in terrorism, money laundering or trade with sanctioned countries. “Once I get this from you, I’m safe. Even if the government comes to you later, I can say I did my job.” Rudd said he doesn’t need to report transactions, regardless of their size, but He will keep records indefinitely.

When it comes to other OTC desks, regulations are generally comparable to normal exchanges when it comes to KYC identity requirements, although they tend to be less regulated.

According to Panu Peltola, chief compliance officer at LocalBitcoins in Finland, regulation is tightening in most parts of the world. He noted that Asia has some of the “most advanced” regulations, followed by North America.

“The EU is simply planning for more comprehensive regulation,” he noted, pointing to proposed rules on tokenizing all transactions over €1,000 from “non-custodial wallets” — any wallet whose private keys are not owned by cryptocurrency exchanges or payment providers, etc. Any wallet held by a centralized company.

“Policymakers around the world have noticed an increase in volume and adoption and are now balancing innovation, growth and risk.”

In the United States, all cash transactions over $10,000 must be reported separately to the IRS, regardless of whether the individual or financial institution received the cash. This form requests full personal information of the cash recipient. Although only a few OTC transactions involve physical cash, the $10,000 floor, similar to the EU’s proposed 1,000-euro limit, also marks the maximum limit U.S. financial institutions must report on electronic money transfers. The real value of these sums is noticeably smaller and smaller due to compounding inflation.

When cash changes hands, the IRS wants to know everything!Source: Internal Revenue Service

With more countries in Asia, lacking a supranational centralized decision-making body like the EU, its regulatory landscape appears more fragmented and difficult to describe, with each country having its own existing and forthcoming regulatory processes.Mainland China, a country with strict capital controls, is perhaps the strictest, whose ambition is to ban trading and mining altogether. In October 2021, Cointelegraph spoke with Henri Arslanian, head of crypto at PwC and former chairman of the Hong Kong Fintech Association, about the ‘flood’ of brick-and-mortar OTC storesmany of which are located in tourist areas to meet tourists from the mainland.

“One can assume 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 the most financially open place in the world, is on the cusp of a ban Retail trading of cryptocurrencies, which would theoretically include over-the-counter transactions, could move OTC stores underground.

XT’s Tan said Singapore had recently introduced stricter measures. “Companies wishing to operate cryptocurrency trading and OTC services to Singaporeans must be licensed under the Payment Services Act,” he explained, adding that exchanges without a PSA license are not allowed to provide services to Singaporeans. Additionally, earlier this year, all Bitcoin ATMs on the island were ordered to close.

talk about money

So, how do OTC counters make money? With the spread, it is comparable to normal exchanges to some extent. While popular exchanges may charge 0.25% for trades, OTC desks typically charge well above 1%. Back in 2017, 2%–3% profit margins were common, Rad said.

Fundamentally, OTC desks operate by matching buyers and sellers, or by automatically fulfilling orders through its own liquidity pool, the former incurring less overhead and risk for the exchange, while the latter allows for instant trades. “That’s why clients are more willing to deal with me,” Ladd said of the advantage of his desk in having his own pool of funds for solid trading.

OTC desk
OTC desks provide a way to avoid exchange slippage.

Another difference between trading desks is whether they trade cryptocurrencies like Bitcoin or Ethereum with fiat currencies or just stablecoins like USDT or USDC. More recently, stablecoins have been trending as they offer buyers more flexibility to exchange for more volatile cryptocurrencies when they see fit. Some exchanges, such as Rad’s Crypto Desk, deal exclusively with stablecoins, further reducing the risk of maintaining liquidity pools.

Rad believes the OTC market will flourish among retail and institutional clients as it is more direct and intimate compared to larger exchanges. For many people, human-to-human transactions are more comfortable than sending money to overseas exchanges, especially when making large one-time transactions.

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

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