OTC settlement: token, fiat and the banking boundary

Concept

Over-the-counter settlement, or OTC, is a transaction in a digital asset or fiat outside a public exchange: directly between the parties or through a broker / desk. In practice it is more often the conversion of fiat into a stablecoin — USDT or USDC — and back: for a cross-border contract, revenue from a foreign client, treasury diversification or private liquidity. Tether's euro token EURT no longer belongs on that list: the issuer wound it down, and redemptions closed for good on 27 November 2025.

OTC is not in itself a violation. The SFC in Hong Kong, MAS in Singapore, the FCA in the United Kingdom, ESMA and national EU regulators under MiCA, and FinCEN and state regulators in the United States all permit OTC on two conditions: the operator holds an applicable licence for regular operations, and the client can document the origin of the fiat and the history of the wallets.

Regulatory framework

A one-off OTC transaction between private persons does not, in many jurisdictions, require a separate licence. For a regular business, exchange operations or an OTC desk, a licensing regime applies:

Operating without a licence in a regular OTC regime creates AML, fraud and sanctions risk — and in 2025–2026 several jurisdictions sharply narrowed the space for unlicensed desks. For the receiving bank everything comes down to two questions: the source of funds and the truthfulness of the payment purpose.

Five OTC settlement formats and their banking readability

Crypto-backed credit: published terms

Most private banks that lend against bitcoin — Sygnum among them — do not publish loan-to-value ratios or minimums and set them case by case. The figures that are public come from specialist lenders and one exchange, and they show how far the terms depend on who holds the collateral.

The published origination figure clusters at 50%: a borrower needs two dollars of bitcoin for every dollar lent. The more telling column is the last one. At Coinbase the collateral leaves the exchange for an on-chain pool and is liquidated automatically; at Ledn it stays with the lender but may be re-posted to a funding partner; at Unchained it sits in a multisig the borrower co-signs. For a banking file the difference matters as much as the rate — the loan agreement and drawdown notice are the source-of-funds evidence, and a lender that can re-post or pool the collateral adds a counterparty to the chain the bank will ask about.

What the bank checks after OTC

The receiving bank analyses:

• who the sender is: a licensed desk, a bank, a neobank, an exchange or a P2P counterparty;
• the sender's jurisdiction and sanctions lists;
• the amount and the pattern of operations;
• the chain history of the wallets, including exposure to Tornado Cash, darknet and ransomware addresses;
• contracts, invoices, settlement statements, tax reporting and the Source of Funds for the underlying asset.

Documents to explain the OTC flow

The standard package:

• the settlement statement of a licensed OTC desk or a contract with the counterparty;
• an invoice in a commercial context;
• wallet history and a chain-analysis report for large amounts;
• documents on the initial acquisition of the crypto;
• tax reporting and a compliance letter.

For a Lombard credit — a loan agreement, a drawdown notice, a collateral statement and a bank statement showing the receipt of the loan proceeds. The detailed general package is in Source of Funds and Source of Wealth.

Common mistakes

• A payment purpose "for services" where the substance is a crypto-fiat exchange.
• P2P without verified identity and source-side KYC.
• A regular OTC flow without an applicable licence.
• Mixed wallet history with ransomware, darknet or sanctioned addresses.
• Round-number incoming payments without a commercial pattern.
• A tax return that does not reflect the crypto realisation in the applicable jurisdiction.

Licensing shifts 2025–2026

The regulatory field for OTC tightened noticeably over 2025–2026 across several key jurisdictions at once. What passed yesterday as a settlement through a familiar desk may today turn out to be unlicensed activity with direct criminal risk for the operator and a frozen payment for the client. Converting fiat into a stablecoin and back has not gone anywhere — what has changed are the conditions under which a bank is prepared to accept it.

Singapore, from 30 June 2025, introduced the Digital Token Service Provider (DTSP) regime under Part 9 of the Financial Services and Markets Act 2022. It captures persons incorporated in Singapore and residents that provide token services to clients outside the country — even if there are no operations inside Singapore. MAS stated directly that it sets the bar high and does not, as a general matter, intend to grant licences under this regime; there is no transitional period, and the base capital is from S$250,000. The former model of an OTC desk serving non-residents "from Singapore" without a local licence is closed off by this.

In the EU the transitional regime under Article 143(3) of MiCA ended on 1 July 2026 at the latest: the date is fixed in the Regulation itself, ESMA's MiCA page restates it, and no extension followed. Since then, crypto-asset services may be provided in the Union only by a CASP authorised under Article 63 or by a bank, investment firm, electronic money institution or other financial entity that has notified its home regulator under Article 60, within the services that article opens to it (Articles 59 and 60 of Regulation (EU) 2023/1114); unlicensed operators had to wind down their activity. A third-country firm may serve an EU client without authorisation only under the narrow Article 61 carve-out: the client must request the service at its own exclusive initiative, any solicitation in the Union rules that out, and the firm may not market new types of crypto-assets or services to that client. National windows differed: the Netherlands and Poland closed theirs back in mid-2025, Germany, Austria and Ireland by the end of 2025, while France, Malta, Luxembourg and Estonia held out until 1 July 2026. Regulators publish no consolidated conversion statistic: industry counts around the 1 July 2026 deadline put the figure at roughly 17% of the 1,200+ previously registered VASPs. That is a press estimate; for the current number of authorised entities consult ESMA's public CASP register.

Hong Kong, where the SFC VATP regime has been in force since 1 June 2023 (the transitional window closed on 31 May 2024), in November 2025 expanded the list of products for licensed platforms and allowed order books to be combined with global affiliates for shared liquidity. In December 2025 the SFC and the FSTB published the conclusions of a consultation on separate licensing of dealers and custodians of virtual assets; a bill is planned to be introduced in the Legislative Council in 2026. For OTC this is a direct signal — dealer activity in virtual assets is moving towards its own licensing regime.

Sanctions screening has also shifted. The US Treasury, on 21 March 2025, removed the Tornado Cash smart contracts from the OFAC SDN list — following the Fifth Circuit decision in Van Loon, where the court held that an immutable smart contract is not "property" and cannot be sanctioned. The passage of funds through the protocol no longer constitutes a direct breach of the OFAC regime. But compliance is slow to turn: Chainalysis, Elliptic and TRM Labs still flag such history, banks keep it at high risk, and the delisting is theoretically reversible. The outcome of a payment is decided by the ability to explain the source of funds and the chain history of the specific wallet, while formal status on a sanctions list is only one of the input parameters.