The OTC (Over-The-Counter) market is a sub-category of the overall spot market. The other major venue for the spot market is cryptocurrency exchanges. The OTC market can be further split between institutional and retail OTC markets. OTC can be done crypto-to-crypto or fiat-to-crypto. OTC allows institutional traders to have direct access to large trades and reduce slippage risk arising from large orders or block trades.
As its name indicates, the institutional OTC market is dominated by institutional brokers, cryptocurrency exchanges, financial institutions, miners, high-net-worth individuals, VCs, hedge funds, etc. Due to its secretive nature, it is hard to evaluate the size of the OTC markets. However, similar to traditional finance, it is very likely that the OTC market size is much larger than the cryptocurrency market size because it is usually more liquid. The size of OTC markets in traditional financial markets is huge: 600 trillion USD in notional value (nominal or face amount used to calculate payments made on that instrument) every year! In crypto, institutional OTC trades currently represent a billion-dollar/day market opportunity. The size of trades on institutional OTCs in crypto markets ranges from 100s to 1000s of Bitcoins and operates in two ways: Principal Model and Agency Model.
An OTC broker will provide a two-way quote depending on the size of its client’s trade. Assuming the clients on both sides of the trade have signed the relevant legal agreements and passed the due diligence tests set up by the broker, the OTC broker will make sure both parties agree on the price and quantity of Bitcoin to be exchanged as well as confirm the timeframe and custodians/institutions involved are all listed in the contract and ready to execute the trade as agreed by both parties. The broker also needs to make sure they are aware of all details with regards to each transaction to make sure both parties are faithful and the transaction will not break. This is done thanks to thorough and costly due diligence (see appendix below.)
The retail OTC markets, P2P markets, especially in China, allow exchanges to provide fiat services without having to apply for money transmitter licenses and going through the regulatory and compliance hurdles of managing cash.
Business Case Studies
Binance Institutional OTC
Binance provides OTC services for orders above 10 BTC.
The chatting venues Binance use for OTC trading are Telegram and WhatsApp.
The unique selling points for Binance users are as follows:
- Personalized services: onboarding, pricing, settlement, exchange views on the markets
- A large number of trading pairs: 150+ coins, alt2alt trading
- Quick pricing
- Fast settlement: minutes for major tokens
- Simple process: block trade discussion in chat, trade confirmed in 1-2 minutes
- Reaching out for price
- Reduced counterparty risk: leave coins on account, swap coins when ready to settle
The conditions to benefit from block trades are as follows: Binance account with level 2 verification, trade at least 10 BTC, access to TG and WA
Binance peer to peer allows its retail users to use fiat currencies to buy and sell cryptocurrencies from various vendors.
Wazirx, a Binance acquisition from India, presents its OTC portal as an order book. The buyer of crypto must make the fiat payment to his or her counterparty’s bank account and the counterparty must acknowledge they have received the payment to release the escrow.
The unique selling points of the platform are as follows:
Fast trading thanks to instant auto-matching: 19.4 minutes on average
- Zero trading fees
- Safe thanks to KYC and verification of the traders
- $18 million USD traded over the counter on P2P
- 0 fraud cases
- 75K app installs.
The platform has a simple registration process:
- Email – Password – Confirmation Email
- Select Country and services available with and without KYC
The P2P UI is very similar to a “classic” trading interface. The only difference is that the settlement happens after the transfer is confirmed and received by the seller, who releases the escrow to the buyer. If the platform is not charging any trading fee, they must make money from the markets and spreads.
OkEx OTC is very similar to Binance services. They provide less fiat currencies than Binance: CNY and VND. However, they allow the trading of more digital assets than Binance. Their UI is very similar to Binance but they provide less information when you are not logged in.
Once logged in, you can access information such as:
- Order Details
- Order ID
Single order max-min limits to Price
Size: Available to buy/Sell
- Counterparty information to Seller Name
- Registration Date to KYC Level
- Completed order number to Completion Rate
Current Sell Orders
- Avg Release time
While the user interface is almost the same for block trading and P2P trading on OkEx, the minimum notional amounts for block trading are much larger and start at CNY 100,000.
Huobi has a similar user interface to OkEx split into 2 segments:
- Retail P2P
- Block Trades
The only difference between these two services is the minimum notional amounts traded, which is CNY 100,000 for block trades.
They provide slightly more information about their merchants:
- Date and Time of Registration
- Security deposit (in Huobi Token)
- The total number of trades completed (Buy and Sell)
- Total Number of Trades During the Past 30 days
- All-time Completion Rate and Completion Rate for the past 30 days
- All-time Average Cancellation Time and Average Cancelation Time for the past 30 days.
- Average Escrow Release Time
- Email, Phone, ID, and advanced (merchant) verification
Kraken purchased Circle OTC desk recently, which has allowed the exchange to provide block trading services. It operates a classic principal OTC desk.
The OTC desk provides deeper liquidity and a more private experience than the Kraken Exchange. Its target customers are institutions and HNWI, who need to complete large trades but need more liquid venues than an exchange due to slippage risk.
Its key unique selling points are discrete, ultra-competitive, and secure operations. The exchange boasts the following features:
- Expert Market Insights: Daily trade and market recaps as well as expert desk opinions
- Full asset support: all currencies traded on Kraken
- 1-to-1 service: consultation, trade reporting + execution, market insights
- Global Coverage: 24/7 excluding major holidays
Minimum Ticket Size: USD 100,000 minimum, down from 250,000 in 2018.
Kraken OTC trading desk works with clients according to a 5-step process:
- Sign-Up by sending an email to the Kraken OTC address
- Onboard: KYC (Government ID, Proof of Residence, Proof of Income)
- Communicate: chat, text, voice call with the OTC desk
- Confirm Trade, specify an address where to send the cryptocurrency and receive trade summary information by email + wire instructions for OTC bank account
- Kraken receives wire, sends assets to the specified address, along with a confirmation email
Coinbase’s OTC business is attached to its custody services and not its exchange, this makes sense as it can provide such services to its existing base of institutional clients and accredited investors.
Contrary to Kraken, Coinbase chose to use the agency-only model. The advantage of this model is that, according to Coinbase, they allow their clients to remain anonymous as the Coinbase OTC team make trades on behalf of their clients. They also guarantee settlement, which is an inherent risk of the agency-only model in case of large price fluctuations.
Coinbase is extremely secretive about its OTC offering and the only way one can get more information about their services is by sending an email to their OTC trading desk.
Gemini has provided OTC-related services through a facility called Gemini Clearing since 2019.
According to the company, the benefits of their offering are as follows:
- Fast Clearing and Settlement (immediate or within approved settlement window)
- Reduce Counterparty Risk thanks to an account funding mechanism
- Compliance with US laws and regulations: KYC/BSA/AML Programs
- Privacy as the trades are settled off-exchange
My guess is that they charge a small transaction fee on both sides of the trade in exchange for providing the platform to settle the trade in a secure way. This could also be an easy way for us to get exposure to the OTC market without having to deal with inventory management.
Bitkan started as a Chinese peer-to-peer crypto trading platform and has slowly expanded its operations. The amounts traded on BitKan tends to be really small. A few 100 RMBs but can be much higher as well and reach 10,000s RMB. Nonetheless, this is not comparable to larger Chinese OTC powerhouses such as Binance, OkEx, and Huobi. It seems BitKan has and will always be a venue for trading small amounts of cryptocurrency for niche Chinese traders.
The information provided about the merchants is similar to larger OTC platforms.
It provides 3 methods of payment: Bank transfers, Alipay, and WeChat for CNY.
Local Bitcoin is one of the oldest OTC trading venues specialized in trading Bitcoin OTC. The platform provides a lot of information about its merchants:
- Trade Volume
- Number of Confirmed Trades
- Feedback Score
- Real Name Verification
- First Purchase
- Account Created
- Email Verification
- Phone Verification
- ID Verification
- Trust Score
- Pro trader sign
- Escrow release time
Genesis is the DCG OTC arm. They have served billions worth of transactions since their inception. To get more information about their service, the counterparty needs to provide their contact information.
Their USPs are as follows:
- Same-day settlement
- Expertise and Insight
- Deep Liquidity
- Regulated in the US: FINRA, SEC, BITLICENSE
- 24/7 Support
Cumberland is a subsidiary of DRW, a regulated international trading firm.
Their USPs are as follows:
- Access to large liquidity pools
- Established business
- successful, reputable, reliable
- Relationship focused
- Trading and Risk Management Acumen
Their website is very simple. It simply describes what they excel at and why. The customer needs to contact Cumberland to receive more information about the onboarding process.
Similar to Genesis Trading and Cumberland, Galaxy Digital provides generic information about its activities as a principal OTC desk, which include:
- Serving a wide variety of clients: crypto mining companies, crypto funds and VCs, family offices and high-net-worth individuals, businesses, blockchain projects, payment, custody financial institutions, hedge funds, asset managers, pension funds
- Risk management (quantitative and qualitative)
- Balance Sheet: principal investments = zero trading fee, money based on spread
- Research and Investment resources
- 24/7 trading services