While informal P2P and OTC markets help to boost crypto adoption in Asia, they also fuel financial crime, writes Jessica Chuah.

The APAC region has become a global center for cryptocurrency growth and innovation. Major financial hubs such as Singapore, Tokyo, and Hong Kong are positioning themselves as leading crypto destinations. At the same time, a lesser-known but rapidly expanding sector is playing a crucial role in shaping the regional crypto landscape: peer-to-peer (P2P) and over-the-counter (OTC) cryptocurrency trading.

These informal markets, which function largely outside formal regulatory systems, differ from centralised exchanges in structure and oversight. P2P platforms allow users to trade directly with each other, while OTC desks arrange large private trades, often with minimal regulatory scrutiny. In many APAC countries – especially where access to official exchanges is limited or prohibited – these markets account for a significant share of crypto transactions, creating a shadow financial system that regulators are now beginning to confront.

As these markets continue to grow, so do concerns about financial crime, fraud, and regulatory avoidance. Informal trading channels have become both vital for adoption and increasingly problematic from a compliance standpoint. In this article, we examine the key drivers and risks of these markets, with a specific focus on the regulatory responses emerging in key jurisdictions like Hong Kong.

P2P and OTC Trading in APAC

Peer-to-peer trading allows individuals to exchange cryptocurrencies directly, through platforms such as Paxful or Binance P2P, without relying on intermediaries. Over-the-counter trading involves high-volume transactions that are arranged privately, often through brokers or dedicated OTC desks operating outside traditional exchange environments.

The term ‘OTC desk’ is often used broadly in the region to describe any business offering in-person crypto sales, from large-scale institutional services to small, physical trading counters.

These models offer distinct advantages such as greater privacy, increased flexibility, and broader accessibility. This has made them popular among retail traders and institutional participants alike, particularly in regions where banking systems are restrictive or crypto services are limited.

Several regional factors contribute to the widespread use of P2P and OTC markets in the APAC region. Regulatory disparities between neighboring countries create opportunities for arbitrage. Countries like China, which have enacted strict bans on crypto trading, have inadvertently fueled underground markets.

In addition, many APAC nations face limitations in banking access or formal crypto infrastructure. Informal markets serve as a practical workaround for users seeking to access digital assets, be it for investment or as a hedge to protect savings against inflation.

High remittance volumes in countries such as the Philippines and Vietnam also support the growth of these informal systems. In such contexts, P2P and OTC trading have filled critical gaps left by underdeveloped or restrictive regulatory environments.

Risks Associated with Informal Crypto Trading

While informal markets may offer some benefits, they also introduce significant risks that could threaten the integrity of the broader financial system. The lack of transparency is one major concern, with transactions often taking place through encrypted messaging applications, private chat groups, or in person, making them difficult to track or monitor.

This opacity allows for the discreet movement of large sums of money, without triggering traditional regulatory alerts. Some OTC desks are specifically designed to match buyers and sellers without divulging each party to the other, further obscuring the flow of funds and making it challenging to trace their origin and destination.

This inherent lack of transparency is compounded by the widespread absence of mandatory KYC and AML procedures in many informal OTC operations. This critical deficiency creates ideal conditions for illicit activities, rendering these channels highly vulnerable to misuse for money laundering, terrorism financing, and various fraud schemes.

Paradoxically, while legitimate crypto firms often struggle to secure stable banking relationships, pushing more activity into these shadow networks, illicit actors sometimes find it easier to open and operate money laundering accounts with traditional banks in major financial centres, as evidenced by Hong Kong-based "pig butchering" scams where victims' funds are funnelled through mainstream banks into crypto.

The consequences of dealing with unregulated crypto platforms are severe and tangible. Hong Kong, for instance, has experienced several high-profile cases directly linked to consumers engaging with unlicensed entities, such as the collapse of the JPEX exchange in September 2023 which caused HKD 1.6 billion in losses to over 2,600 claimants.

Beyond direct financial crime, informal OTC trading can distort market signals. Unreported large trades may lead to price manipulation or the concealment of true market volume, undermining fair price discovery. As OTC activity increasingly overlaps with decentralised finance (DeFi) protocols, the risks extend further into the shadow crypto economy, an area largely beyond current regulatory reach.

The problem is further exacerbated by the involvement of serious organised crime groups, such as the 14K Triad, which has been linked to crypto fraud and human trafficking in scam compounds in Southeast Asia.

The cross-border and decentralised nature of cryptocurrencies further complicates law enforcement and oversight efforts. In China, despite a comprehensive ban on crypto trading, underground P2P and OTC networks continue to operate, playing a central role in facilitating illicit fund transfers and capital flight.

Similarly, in countries like the Philippines and Vietnam, where crypto adoption is high but enforcement is relatively lax, P2P markets are deeply embedded in the retail trading environment, exposing users to systemic risks due to weak regulatory oversight.

A significant and often overlooked component of the informal market is the proliferation of cryptocurrency ATMs. These physical machines allow users to deposit cash in exchange for crypto or withdraw cash from crypto holdings, frequently without requiring identification. This creates a direct and anonymous bridge between the cash economy and the digital asset world.

In Hong Kong alone, a dense network of physical OTC shops and crypto ATMs has been identified, making monitoring and enforcement exceptionally challenging for authorities, as these machines can be used to bypass the formal financial system entirely and facilitate street-level money laundering.

Towards a Regulated APAC Crypto Economy

Hong Kong authorities have proposed a new regulatory framework that will require virtual asset OTC service providers to obtain licenses from the Securities and Futures Commission (SFC).

Under earlier proposals, the Customs and Excise Department was designated as the primary regulator for these services, similar to traditional Money Service Operators (MSOs), but it was determined that these activities are much closer to securities dealing than simple money changing.

Still, the proposed regulatory framework directly targets the shadow cash-for-crypto market, capturing simple crypto-to-fiat conversions, brokerage activities, block trading, and services provided by advisors and asset managers.

The framework imposes strict capital, client asset segregation and other investor protection requirements on licensees, along with obligations to conduct customer due diligence, maintain records and use technological solutions like blockchain analytics for transaction monitoring.

To deter non-compliance, the proposed sanctions are severe, including fines of up to HKD 5 million and seven years' imprisonment for operating without a licence, making the new regime one of the most direct efforts in the region to bring informal crypto markets under legal supervision.

Singapore regulates digital payment tokens through its Payment Services Act, but has yet to introduce specific rules targeting P2P or OTC transactions. Japan enforces strict compliance requirements for registered exchanges, but informal OTC and P2P markets often fall outside the scope of current laws.

Other countries, including Thailand, Vietnam, and the Philippines, are in the process of developing regulatory frameworks. However, implementation and enforcement remain inconsistent, allowing informal markets to remain. This regulatory fragmentation creates opportunities for bad actors to exploit weaker jurisdictions and engage in cross-border arbitrage.

Charting a Path Forward

Informal crypto markets, including P2P, OTC and ATM trading, have become indispensable parts of the APAC’s digital asset ecosystem. While they fill critical gaps where traditional financial systems fall short or regulatory barriers are high, their largely unregulated nature poses significant and escalating risks to financial integrity, user protection, and the efficacy of law enforcement.

Addressing these challenges demands a more coordinated and proactive regional response. While jurisdictions like Hong Kong are leading the way by extending capital, custody, AML, and investor protection regulations to the informal crypto economy, progress across APAC remains uneven. The imperative now is for other jurisdictions to align their regulatory efforts, and foster greater transparency and consistent enforcement.

Ultimately, ensuring the safe and sustainable expansion of the crypto economy across the APAC region hinges on robust regulatory harmonisation and intensified international cooperation. Only through collective action can we mitigate the inherent risks of informal trading channels and cultivate a resilient, transparent, and secure digital asset landscape.

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By Jessica Chuah, Vice President of Growth (APAC), Crystal Intelligence