Written by: Niu Xiaojing, Xu Xiaohui
I believe many of you have heard of the Mundellian Trilemma in international finance, also known as the trilemma, which refers to the impossibility of a country achieving the following three things at the same time:
- Capital mobility
- Exchange rate stability
- Monetary policy independence
Similar "impossible triangle" phenomena are also common in other fields. For example, the process of cryptocurrency withdrawal (converting cryptocurrency into legal currency and withdrawing cash) also faces the "trilemma". Here, the "impossible triangle" can be described as: high security, high convenience and low cost. These three elements are often difficult to achieve at the same time, but they constitute the core needs of users.
So, can OTC (Over-The-Counter) trading in the field of cryptocurrency in Hong Kong alleviate this contradiction or even break through this constraint? The following will analyze the performance of the Hong Kong OTC market in this "impossible triangle" one by one.
Analysis of the advantages and disadvantages of Hong Kong OTC market
Security
Fund security: Currently, the cryptocurrency OTC market in Hong Kong is not fully regulated. These OTC dealers are usually not under the jurisdiction of the Hong Kong Money Services Association (MSO) or the Securities and Futures Commission (SFC). However, some merchants hold money changer licenses (regulated by the Hong Kong Customs), so they are more reliable to a certain extent.
According to the public consultation document on the "Legislative Proposal on Regulating Over-the-Counter Transactions of Virtual Assets" (hereinafter referred to as the "Virtual Asset OTC Consultation Document") issued by the Hong Kong government, the Hong Kong Customs will issue licenses to virtual asset OTC service providers in the future, requiring all service providers to operate with a license. The introduction of this regulatory framework is expected to increase industry transparency and reduce the risk of non-compliant operations.
However, due to the lack of effective supervision, OTC transactions still have certain risks. For example, some customers' bank cards were frozen by Hong Kong banks after receiving remittances from OTC merchants. To reduce such risks, users should give priority to merchants that also hold money change licenses or are certified by large exchanges (such as Binance or OKX).
Personal information security: Personal information leakage is a major hidden danger in Hong Kong's OTC industry. Since 2012, money changers in Hong Kong have implemented a real-name system, requiring customers to provide their real-name information before transactions. By 2023, RMB exchange will further require:
- Customer's Hong Kong bank account
- Customer's personal bank account in China
- Customer Hong Kong and Macau Pass
Some money changers even require you to provide bank card fund flow records in China. These personal information are kept by each money changer on their own, and the lack of a unified platform and strict supervision makes the risk of information leakage extremely high.
Under the current legal framework in Hong Kong, the confidentiality requirements for money changers are far less stringent than those in the banking, securities, insurance and other fields, and no judicial authorization is required for random checks of information. This is a significant risk for high net worth clients. Therefore, it is crucial to choose a compliant and reputable merchant.
Exchange cost
Spread and Fees: The spread of OTC transactions is usually higher, about 1%-3%. Compared with public order trading on exchanges, OTC transactions are more expensive, but in exchange for flexibility in transaction size and speed.
Advantages of large-volume transactions: For large-volume transactions, the spreads and fees in the OTC market are usually lower than those in the exchange. Some service providers can adjust the rates according to customer needs and provide more attractive cost solutions for large-volume customers.
Negotiable price and hidden costs: The flexibility of the OTC market allows users to negotiate prices with merchants. Loyal customers may enjoy additional discounts. In addition, compliant platforms usually provide transparent rate quotes to avoid hidden fees. However, in informal platforms, customers may be burdened by opaque exchange rates or additional fees.
Convenience
OTC market transactions are relatively convenient.
Flexible trading hours: Most well-known OTC platforms provide 24/7 services, allowing users to complete transactions at any time.
Process large trades quickly: The OTC market supports large trades in the millions of dollars without having to worry about market slippage (price fluctuations due to changes in trading volume). This is especially important for institutional or high net worth clients.
Offline trading network: There are physical OTC counters in many financial center areas of Hong Kong (such as Central). Users with large exchange needs are advised to go directly to the store to complete the transaction.
Attorney Mankiw's Summary
Hong Kong's OTC market cannot break through the impossible triangle of "high security, high convenience and low cost", but its flexibility, diversified services and unique geographical advantages have alleviated the withdrawal difficulties of cryptocurrency investors to a certain extent.
At the same time, as the Hong Kong government gradually introduces a regulatory framework for virtual asset transactions, the security and transparency of the OTC market is expected to be further improved. However, users still need to be cautious when choosing traders, give priority to compliant platforms or reputable merchants, weigh the trade-offs between security, convenience and cost, and find the most suitable solution for themselves to avoid potential risks.
