The need for options outside of a standard exchange has increased as the cryptocurrency market has rapidly grown and evolved. Over-the-counter trading, also known as OTC trading, is one framework that provides a way to buy and sell crypto directly between two private parties. Understanding what OTC trading is, how cryptocurrency works and the benefits of this method are crucial to deciding whether it’s the right avenue for you.

Read on to learn more about OTC trading. We cover everything from the basics of cryptocurrency to the benefits of OTC trading and Australian regulations below:

What is cryptocurrency?

Cryptocurrency is a digital currency secured using a technique known as cryptography, making these currencies practically impossible to counterfeit. As an alternative to real-world currencies, such as the dollar, cryptocurrencies are kept in decentralised networks that use blockchain technology. Essentially, you have a digital wallet with virtual money that you can use to purchase things.

One of the reasons for the growth of cryptocurrency is its decentralised structure. As a digital asset that exists across a wide network, cryptocurrency isn’t under the control of a specific government or authority, leaving it less open to manipulation. Some examples of popular cryptocurrencies include:

• Bitcoin (BTC)
• Ethereum (ETH)
• Tether (USDT)
• Binance Coin (BNB)
• Dogecoin (DOGE)

What is OTC trading?

Two parties can use over-the-counter trading to trade crypto assets without any third party in the middle. Unlike your typical exchange, OTC trading is private and contained between two individuals. You can imagine OTC trading as a traditional sales conversation, where the person selling the item negotiates directly with the person looking to buy the item on a personal level.

OTC trading isn’t limited to cryptocurrency. While crypto-to-crypto trades are one option, such as swapping Bitcoin for Ethereum, trading crypto for fiat currencies is also standard. Fiat currencies are the traditional money we use for day-to-day expenses, such as US Dollars, Euros or Australian Dollars. Working with an OTC desk is popular for OTC trades.

Who uses OTC trading?

OTC trading provides what could be considered a ‘VIP’ service to traders that want to spend from a large capital base. Most commonly, hedge funds, private traders and institutional investors will choose OTC trading as the ideal solution for high-volume trades that may be less suited for other trading methods. For instance, someone wanting to buy exactly 2,000 BTC will find it challenging to get that amount from one seller in an exchange at a flat price, considering other orders, time and market volatility.

How does OTC trading work?

OTC trading is a relatively straightforward process. Some of the steps you can expect from a crypto OTC trading process include:

1. Find a counterparty for trade

Having a person to trade with is the first step. This communication could be over chat or through an OTC brokering platform. Our partner HAYVN, for example, offers relationship managers, telegram, email, telephone or in-person contact.

2. Perform due diligence

Completing a ‘Know Your Customer’ check is the ideal way to meet due diligence when trading in Australia. This process involves confirming the identity and legitimacy of the person you want to trade with.

3. Negotiate the terms of the trade

The terms of the trade specify what you’d like to buy when you’d like to buy, and how much you’d like to pay. During negotiations, you and the other party decide on these terms and reach an agreement.

4. Complete the transfer of funds

Following negotiation, funds transfer from the buyer to the seller. Once fulfilled, the cryptocurrency is transferred to the buyer, and the OTC trade is complete.

What are the benefits of crypto OTC trading?

If you’re considering crypto OTC trading, understanding the advantages of this option as a merchant service is a good starting point. As a specific method suited to a particular audience, it’s important to decide whether your goals fit the particulars of this trading solution. Some of the benefits of choosing OTC include:

Improved prices

As an OTC trade is one big order as a single purchase, your investment price may be improved compared to purchasing on a regular exchange. While a large-volume order on an exchange may experience slippage as prices change, OTC is a one-and-done deal. A fee is agreed on and then paid, with no waiting or additional steps required.

Greater liquidity

Large-volume orders can be a challenge in cryptocurrency exchanges. If the liquidity is not enough for a trade of that size, you may not always be able to get the volume you want. By contrast, OTC trading is subject to a single seller rather than the variability of a larger market.

Faster trading

With low liquidity, a large trade on an exchange can take several days to fulfil. The result is variability in prices and delays in accessing purchased cryptocurrency. OTC trading is based on cryptocurrency already being available and ready to go, allowing for a faster trade without waiting around. Working with an OTC desk means no ambiguity, allowing for speedier transactions.

Privacy with no third parties

The confidentiality of OTC trading is one of the most integral benefits of this method. As trades are one-on-one, with no involvement from any other system or third party, the space for trading is entirely private. Buyers and sellers concerned about risk or threats regarding high-value transactions can keep their trade confidential, away from the public eye.

Australian regulations for OTC trading

Cryptocurrency is legal in Australia and is treated as property. This legal status means Australian traders must abide by the Anti-Money Laundering and Counter-Terrorism Financing Act 2006. In addition, all exchanges must be registered with the Australian Transaction Reports and Analysis Centre (AUSTRAC) to maintain records, verify users and comply with government requirements.

However, OTC trading and exchange trading are two different things. The Australian Securities & Investments Commission, or ASIC, is responsible for making and enforcing the rules surrounding these trades. Under the ASIC Derivative Transaction Rules, all derivative transactions need to be reported appropriately as per the Regulatory Guide. Working with a regulation-led OTC desk is an ideal option to ensure you’re meeting your legal obligations.

Venue Smart is your trusted OTC partner

Are you considering OTC trading at your business? Venue Smart can help you to get started. Get in touch with our team today to learn more about what we could do for you.