Legal Nature and Transaction Risk Management of Bitcoin Relative Trading

Understanding the Criteria for Determining Illegality

You may have increasingly encountered the term “over-the-counter (OTC) trading.” This refers to transactions where cryptocurrencies are bought and sold directly between parties without going through an exchange. However, there are many misconceptions and concerns regarding its legal nature. In this article, we will provide a practical explanation of whether OTC trading is truly illegal, based on Japan's legal system.

What is OTC Trading?

Definition of OTC Trading and Its Market Position

Over The Counter (OTC) trading is a transaction that occurs without using order book systems, where the seller and buyer negotiate prices and quantities directly to reach an agreement. In the cryptocurrency markets, such as Bitcoin, trading mainly occurs on exchanges, but OTC trading is utilized for large-volume transactions or when customized conditions are needed.

In the Japanese market, the “sales office” functions provided by cryptocurrency exchange operators are similar to OTC trading. However, the OTC trading referred to in this article means “direct transactions without intermediaries” and “free price negotiations between individuals.”

Japan’s Legal Regulatory Framework and the Position of OTC Trading

Framework Under the Payment Services Act

Since the amendment of the Payment Services Act in 2017, Japan has become a country that strictly regulates cryptocurrency exchange businesses. Under this law, operators handling cryptocurrencies are required to register with the Financial Services Agency (FSA). When general users utilize registered exchanges, there are no legal issues.

The Legal Gray Area of OTC Trading

The legality of OTC trading is judged based on three criteria: “recurrence,” “profit motive,” and “provision to an unspecified number of people.”

Cases where it is not illegal:

• One-time Bitcoin transactions between acquaintances
• Asset transfers between individuals without profit motive
• Selling to friends without charging a fee

Cases where it becomes illegal:

• Repeatedly mediating cryptocurrency transactions
• Providing transactions repeatedly to multiple parties for profit
• Collecting and selling cryptocurrencies from unspecified persons without registration

In other words, one-off personal transactions are legally permissible, but acting as an intermediary without registration is illegal.

How OTC Trading Works and the Typical Process

Typical Transaction Flow

OTC trading proceeds through the following steps:

1. Seller and buyer agree on price and quantity
2. Both confirm payment method and transfer schedule
3. Buyer transfers Japanese yen to the seller’s designated account
4. Seller sends Bitcoin to the buyer’s wallet
5. Both confirm receipt and complete the transaction

This simple process differs from exchange-based trading in its directness and lack of intermediary involvement.

Benefits and Use Cases of OTC Trading

Advantages

Minimizing Price Impact in Large Transactions By avoiding order book depth, OTC trading prevents market disruption.

Flexible Negotiation of Conditions Quantity, settlement period, receipt method, and other terms can be customized to suit both parties.

Privacy Preservation Since transactions are directly between individuals, there is less public record of the transaction history.

Risks Associated with OTC Trading

Fraud and Asset Recovery Risks

When trust in the counterparty is low, issues such as non-delivery of Bitcoin after payment or non-payment after receiving Bitcoin can occur. Unlike exchanges, which hold funds in escrow until both parties confirm, OTC transactions lack such protections.

Money Laundering and Tax Evasion Concerns

Transactions outside of legitimate exchanges make it difficult to trace the origin of funds. Even if there is no illegal intent, such flows may be viewed as suspicious and could attract investigation.

Legal Compliance Risks

Even OTC transactions are illegal if they constitute business activities. Unknowingly violating laws can result in legal consequences.

How to Mitigate Risks and Conduct Safe Transactions

Use Registered Exchange Operators

Unless there is a specific reason to prefer OTC trading, the best practice is to use FSA-registered exchanges. Registered operators are subject to legal requirements for identity verification, fund management, and security, providing a higher level of protection for individual users.

Importance of Wallet Security

When conducting OTC transactions, it is essential to store and send assets securely using a reliable wallet. Understanding the differences between hot and cold wallets and choosing appropriately based on transaction scale is crucial.

Record-Keeping and Evidence Preservation

If conducting OTC transactions without third-party involvement, it is important to document details such as price, quantity, transfer schedule, and the counterparty’s identity in writing and keep these records. Such documentation can serve as legal evidence in case of disputes.

Carefully Select Trustworthy Counterparties

For high-value OTC transactions, limit dealings to parties with verified identities and trustworthy transaction histories. Engaging in large transactions with strangers on social media or bulletin boards carries a very high risk of fraud.

Future Market Trends and Regulatory Policies

Expansion of the OTC Market

As large-scale transactions by institutional investors and individual traders increase, OTC trading is expected to expand. However, this may also lead to stricter regulatory oversight by authorities.

Monitoring Legal Reforms

With the maturation of the cryptocurrency market and progress toward international regulatory harmonization, regulations concerning OTC trading are likely to be strengthened. Staying informed about industry developments and the latest legal updates is essential for avoiding trouble.

Conclusion

OTC trading itself is not illegal. However, engaging in continuous intermediary activities for profit, offering to an unspecified number of people, or using it for opaque fund flows can pose legal risks.

To ensure safe and trustworthy cryptocurrency transactions, the following three points are crucial:

• Use FSA-registered exchange operators whenever possible
• Keep detailed records when conducting OTC trades
• Verify the identity and reliability of the counterparties thoroughly

The cryptocurrency market is rapidly evolving. Regularly referring to the latest legal information and acting with caution in all transaction types, including OTC, is the best strategy for asset protection and legal compliance.