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:
| Jurisdiction | Regime | Regulator |
|---|---|---|
| Hong Kong | VATP (Virtual Asset Trading Platform) or MSO (Money Service Operator) | SFC / Customs & Excise |
| Singapore | Digital Payment Token Service, including Major Payment Institution | MAS under the Payment Services Act 2019 |
| EU | MiCA authorisation (CASP) | National regulators under MiCA |
| United Kingdom | Crypto-asset firm registration | FCA |
| United States | FinCEN MSB + state money transmitter licences | FinCEN + state regulators |
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 (see the section below). 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
False payment purpose (anti-pattern, what must not be done)
This is a direct violation, shown here as an anti-pattern. Fiat arrives with a purpose of "consulting", "marketing" or "equipment", while in fact it compensates for USDT that was transferred. There is no real buyer of the service — the counterparty is an OTC desk or the other side of the exchange. On discovering the mismatch between the stated purpose and the substance, the bank qualifies the payment as a misrepresentation.
This is a misrepresentation to the bank and an AML violation. In the UK — POCA 2002 s.327–329. In Hong Kong and Singapore — bank fraud and AML regimes: in Hong Kong the operative statute for CDD and reporting is the AMLO (Cap. 615), while the Banking Ordinance governs bank licensing and supervision; in Singapore — the Payment Services Act. The result — account freeze, STR / STRO escalation, criminal risk for the UBO.
P2P through unregulated channels
Buying USDT through Telegram, a LocalBitcoins-style service or an unregulated P2P exchange may formally not be prohibited for a one-off transaction, but it passes bank review poorly. The bank does not see a verified counterparty, does not understand source-side KYC and cannot rule out darknet, ransomware or sanctioned wallet history.
Chain-analysis providers Chainalysis, Elliptic and TRM Labs flag clusters of wallets. If the source is tainted, the bank holds the incoming funds, returns them to the sender or initiates a freeze.
Licensed OTC desk
Working with a licensed desk is a legal format when the conditions are met: an applicable licence, client KYC, a confirmed source of the crypto-asset, and the operation recorded as a crypto-fiat exchange rather than as a service.
Rails: a DPT-licensed MPI in Singapore, a VATP in Hong Kong, a MiCA-authorised CASP in the EU. The weak link is the receiving bank: not every one accepts incoming funds from a licensed crypto-VASP. Realistic ones are DBS Treasures, DBS Private Bank, Bank of Singapore, Standard Chartered Singapore, some HK virtual banks (ZA Bank), FV Bank, Pave Bank, EQIBank.
Bank-mediated DPT swap
A regulated bank or Major Payment Institution acts as counterparty: it accepts fiat, executes the conversion on its own balance sheet and sends the digital payment token to the specified wallet.
In Singapore — FOMO Pay, with a MAS Major Payment Institution licence PS20200145 and DPT-service permission. In the documents the fiat leg looks like a payment to an MPI, the DPT leg — like a digital payment token disbursement. The Source of Funds for the next bank is confirmed by the settlement statement of the licensed MPI.
Lombard credit against crypto collateral
For a UHNW client — often the cleanest route. The asset is placed in custody with a Swiss, Singapore or Hong Kong private bank, and a fiat loan is issued against it as collateral; the crypto position is retained. Legally this is secured lending with its own Source of Funds — a loan agreement and a drawdown notice from the bank.
A typical LTV for BTC / ETH is 40–70%, often around 50% at the start. Stablecoins as collateral are usually not accepted in a Lombard facility. The thresholds below are published indicative figures; only the DBS Private Bank one is confirmed on the bank's own site, and banks apply their minimums case by case. Minimums: Swiss private banks from CHF 5M+ AuM, DBS Private Bank — US$5M, Bank of Singapore — US$5M, UOB Private — US$5M.
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 MiCA transitional period expired on 1 July 2026: ESMA confirmed the date on 17 April 2026, and no extension followed. Since that date, providing crypto services to EU clients without CASP authorisation breaches EU law, and unlicensed operators had to wind down their activity. 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.
Frequently asked questions
Is a one-off OTC a violation
A one-off transaction between private persons does not in most jurisdictions require a licence. A regular OTC regime, exchange operations or working as an OTC desk do require a licence (VATP, MSO, DPT, MiCA CASP, FCA registration, FinCEN MSB). Without a licence — AML, fraud and sanctions risk.
Why the bank refuses to accept incoming funds from P2P
The bank does not see a verified counterparty and source-side KYC. Chain-analysis tools may show a link to darknet, ransomware or sanctioned addresses. Even with a clean history, the absence of a documentary trail makes the incoming funds unsuitable for compliance review.
When a Lombard credit is better than an outright sale
For a UHNW BTC / ETH portfolio with a holding horizon and an expectation of growth. A Lombard facility makes it possible to obtain liquidity without realising the crypto-asset, without a tax event and without breaks in the investment position. LTV 40–70%, a minimum of US$5M+ AuM for most private banks.
What counts as sufficient Source of Funds for a crypto receipt
A settlement statement of a licensed OTC desk or an exchange, a contract for the initial acquisition, wallet history, a chain-analysis report, and tax reporting in the country of residence. For large amounts — a separate compliance letter from a UK solicitor or an ICAEW / ACCA auditor.
Which banks accept crypto-related incoming funds
Selectively: DBS Treasures, DBS Private Bank, Bank of Singapore, Standard Chartered Singapore, some HK virtual banks (ZA Bank), specialised providers FV Bank, Pave Bank, EQIBank, Keytom. The decision is always individual — it depends on the client profile, the source of the asset and the chain history.
What Tornado Cash post-OFAC means
Tornado Cash is a crypto mixer that OFAC added to the SDN list in August 2022. After the Fifth Circuit decision in Van Loon (November 2024), the US Treasury, on 21 March 2025, removed the protocol's smart contracts from the sanctions list — formally, operations through them no longer breach the OFAC regime. But banks and chain-analysis providers still mark such history as high-risk: delisting does not erase past exposure and is theoretically reversible. Wallets with Tornado Cash contact remain problematic in US-connected compliance.