Are Bitcoin peer-to-peer transactions truly illegal? A thorough examination from laws and real-world examples

As a method of cryptocurrency trading, the term “Over The Counter” (OTC) is frequently heard. It refers to the direct buying and selling of Bitcoin and other digital assets between individuals or companies without using an exchange. However, many people wonder, “Isn't this illegal?” In this article, we will explain in detail the legal standing of cryptocurrency OTC trading, the actual risks involved, and how to mitigate them.

Understanding the Basics of OTC Trading (Over The Counter Trading)

What is OTC Trading?

OTC trading is a transaction where the parties negotiate directly with each other without going through a cryptocurrency exchange. This method is increasingly used for large-volume transactions like Bitcoin or transfers between individuals.

In Japan's regulatory framework, “sales office” services provided by cryptocurrency exchange operators also have OTC-like aspects. However, the OTC trading referred to here mainly means “direct peer-to-peer transactions without third parties.”

How Does Actual OTC Trading Work?

For example, Person A and Person B contact each other directly, negotiate the price, amount, and payment method for Bitcoin. Then, Person A deposits Japanese Yen into a designated account, and Person B sends Bitcoin to Person A's wallet. This is the typical flow.

How Is OTC Trading Treated Under Japanese Law?

Current Cryptocurrency Regulations

Japan has some of the strictest cryptocurrency regulations worldwide. Since the 2017 revision of the Payment Services Act, cryptocurrency exchange operators are required to register with the Financial Services Agency (FSA). Buying and selling Bitcoin and other cryptocurrencies on registered exchanges is explicitly permitted by law.

Legal Position of OTC Trading

OTC trading itself is not outright “illegal.” Its legal treatment depends on the nature of the transaction:

Permissible OTC Transactions

• Single, one-time exchanges of Bitcoin between acquaintances (e.g., buying one coin from a friend) are not explicitly prohibited under current law.
• Personal, non-repetitive transactions for non-profit purposes are generally acceptable.

Illegal OTC Transactions

• Repeated, continuous, profit-driven virtual currency brokerage or trading with unspecified parties falls under the Payment Services Act.
• Engaging in unregistered virtual currency exchange activities is illegal and subject to penalties.

In summary, if it is a “one-time between individuals,” legal issues are less likely to arise. However, if it involves “repetition,” “charging fees,” or “dealing with unspecified parties,” registration becomes necessary.

Comparing the Merits and Demerits of OTC Trading

Merits

Capable of Large Transactions
Without using exchange order books, large-volume trades can be executed, minimizing market impact.

Flexible Trading Conditions
Selling conditions, settlement methods, and additional terms can be freely negotiated between parties.

Demerits & Risks

Fraud and Disputes
If trust is lacking, there is a risk that you transfer money but do not receive Bitcoin, or vice versa.

Legal Risks
Since official exchanges are not used, tracing the source of funds is difficult, raising concerns about tax evasion or money laundering.

Legal Risks of Unregistered Business
Engaging in profit-oriented, repetitive virtual currency brokerage can violate the Payment Services Act and lead to penalties.

How to Safely Conduct OTC Trading

The Best Approach: Use Registered Exchanges

Unless there is a specific reason to prefer OTC, it is strongly recommended to use cryptocurrency exchanges registered with the FSA. Registered exchanges have proper identity verification procedures and compliant fund flows, significantly reducing legal risks and the chance of asset loss.

Choose High-Security Wallets

When engaging in OTC trading, it is essential to manage your digital assets with secure wallets. Using user-friendly and secure wallet services is crucial.

Keep Written Records

If you must conduct OTC transactions, keep records of contracts, transfer receipts, and confirmation of delivery as much as possible. These documents serve as important evidence in case of disputes. If problems arise, promptly consult police or legal professionals.

Future Outlook for Cryptocurrency Markets and OTC Trading

As the cryptocurrency market expands, demand for OTC trading is also increasing. Not only large investors but also general users are expected to participate more. At the same time, government and financial authorities are likely to strengthen regulations further.

The cryptocurrency industry is subject to rapidly changing legal environments. Staying updated on the latest rules and acquiring proper knowledge is key to ensuring safe transactions.

Summary

While Bitcoin OTC trading itself is not illegal, engaging in repetitive, profit-driven, or third-party asset management activities can pose legal risks. To trade cryptocurrencies safely and securely, it is crucial to use trusted registered exchanges, understand current laws, and exercise careful judgment. Deepening your knowledge and making smart decisions will help you navigate the cryptocurrency era wisely.