Investment Must-Read Guide How Much Do You Know About Deposit and Withdrawal? Compliance and Safety are the Most Important

Investment Guide Deposit and Withdrawal Knowledge, Compliance and Safety are Key

Looking back at the major events that have occurred in the currency circle in the past year, governments around the world have been continuously strengthening their attention and implementing strict regulations on the fiat currency inflow and outflow markets. This article will focus on the types of projects for cryptocurrency inflows and outflows, regional legal regulatory requirements, and the acquisition of regulatory licenses by large exchanges.

Looking back at the major events that have occurred in the currency circle in the past year, the collapse of FTX brought about a tightening of cryptocurrency regulation, Hong Kong emphasized the importance of compliance licenses for inflows and outflows, and the SEC sued centralized exchange giants Binance and Coinbase. Governments around the world have been continuously strengthening their attention and implementing strict regulations on the fiat currency inflow and outflow markets.

Using fiat currency to purchase cryptocurrencies is the first step for most users to enter the Web3 world. Regardless of the type of deposit method used, the user’s funds and accounts should be secure, and the transaction method and platform need to be legal and compliant. The project party needs to obtain a remittance license in the local area and verify the user’s identity in order to provide financial services such as inflows and outflows.

This article will focus on the types of projects for cryptocurrency inflows and outflows, regional legal regulatory requirements, and the acquisition of regulatory licenses by large exchanges.

Types of Projects for Inflows and Outflows

In general, the channels for buying and selling cryptocurrencies can be divided into two types: over-the-counter (OTC) trading and on-exchange trading.

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The first difference is the location. On-exchange trading generally takes place on a centralized exchange, similar to traditional stock exchanges. Off-exchange trading, on the other hand, does not take place in a centralized fixed location, but is conducted in various locations, such as face-to-face transactions or through WeChat.

The second difference is the target of inflows and outflows. For on-exchange trading, the target of inflows and outflows is the exchange itself. Users deposit fiat currency to the exchange, which is called an inflow, and withdraw fiat currency from the exchange, which is called an outflow. For off-exchange trading, the target of inflows and outflows is other users. User A deposits fiat currency to another user B, which is an inflow, and user A receives fiat currency from another user C, which is an outflow.

1. Over-the-counter (OTC) Trading

Over-the-counter (OTC) fiat currency inflow and outflow projects allow direct transactions between buyers and sellers, bypassing intermediaries. However, this is also a high-risk area for fraud. There are two main modes:

• OTC Desks, such as Kraken OTC. In the OTC desk mode, the trading parties are the customer in need of trading services and the OTC desk as the counterparty. This mode has three major advantages for inflows and outflows:

• No slippage. By providing fixed quotes for large transactions to avoid losses caused by slippage, the customer bears the risk and has the possibility of making profits from better-than-quoted price execution.

• More liquidity. OTC desks can execute trades at the best prices across multiple liquidity platforms.

• High privacy. By trading directly with OTC desks, customers can protect their privacy and avoid their trading information appearing on public order books.

• Customer-to-customer (C2C), such as OKX C2C Trading. This refers to direct transactions between individuals for fiat currency inflows and outflows, without intermediaries or third parties. OKX holds the digital asset of the buyer/seller until confirmation of receipt/payment is received from the other party. The platform recommends that users transact with certified merchants, as all certified merchants have undergone thorough scrutiny by OKX. The advantages of C2C are as follows:

• Support for multiple payment methods. Buyers and sellers can define any payment method they choose, and as long as the transaction is confirmed after the actual transaction, the transaction can be completed.

• Low trust cost. Both parties to the transaction must pass the platform’s identity verification, and even stricter merchant certification review. The platform also discloses users’ transaction information as a reference for creditworthiness, but it cannot avoid the risk of some counterparties delaying or canceling orders.

• High privacy. In many countries (such as India), banks prohibit users from engaging in cryptocurrency transactions to avoid potential future policy risks. With C2C trading, users can conceal the purpose of the transfer from the bank, thereby bypassing the bank’s restrictions.

However, these types of transactions, except for the introduction of third-party platforms, are completely matched privately to avoid high intermediary fees. Due to the imperfect trust mechanism and information asymmetry, private transactions between these users frequently occur with higher risks.

2. Cryptocurrency ATM

As a physical machine, the operation and maintenance costs are higher, so the exchange fees are also high, some even reaching 20%. Cryptocurrency ATM merchants buy liquidity from third-party suppliers and transfer it to users’ self-hosted wallets, so they need remittance licensing.

The biggest advantage of cryptocurrency ATMs is anonymity and privacy, as users can purchase cryptocurrencies with cash, often without KYC processes. Sometimes, identification documents may be required, but proof of residence and facial recognition are not necessary.

However, they support few types of cryptocurrencies, mainly BTC and ETH, and most ATMs do not provide cash withdrawal services. With high transaction fees, they are often referred to as the most cumbersome way to purchase cryptocurrencies.

3. Centralized Exchange (CEX)

Centralized exchanges are the most commonly used fiat currency deposit and withdrawal platforms. Exchanges naturally have licensing advantages, lower fees, support for various cryptocurrencies, and are the largest liquidity providers in the ecosystem. Retail users can freely deposit and withdraw funds through custodial wallets, while merchants mostly implement transactions and transfers through APIs and SDKs. As liquidity intermediaries, centralized exchanges profit from the price difference of buying and selling liquidity and user fees.

When merchants and their customers use wallets hosted by the same exchange, there are no fees for transactions because the funds are only transferred between different accounts within the same custodial wallet. However, if self-hosted wallets are used for transfers, corresponding blockchain network fees will be charged.

4. Independent Deposit and Withdrawal Projects

Independent deposit and withdrawal projects, such as MoonLianGuaiy, operate like small exchanges, but mostly only provide fiat currency deposit and withdrawal services. They also need to register remittance licenses in each operating region. However, due to their relatively small scale and limited legal and technical resources, these types of projects are more vertical and focused on a single field of use.

Due to differences in liquidity sources and the fact that most customers need to provide self-hosted wallet addresses, the fees for these types of projects are higher compared to centralized exchanges, as they include intermediary fees and network fees. Although independent deposit and withdrawal projects are smaller and generally have higher fees than centralized exchanges, they also have their advantages:

• A simple and user-friendly interface. The minimalistic interface will directly display the fiat currency amount and the corresponding cryptocurrency amount. Users only need to verify their identity for large transactions, making it user-friendly for small deposit and withdrawal amounts.

• High privacy. Most projects only support self-hosted wallets, eliminating the step of transferring cryptocurrencies from custodial wallets and minimizing the use of other wallet information by users.

• Most projects allow partner distributors to set distribution bonuses through SDKs, enabling distributors to have control over profits, while the profit-sharing of centralized exchanges is not as clear-cut.

5. Fund Aggregator

A fund aggregator, such as MetaMask’s fiat deposit service, guides users to purchase and earn commissions by providing quotes from multiple independent deposit and withdrawal projects and centralized exchanges. This type of aggregator is essentially an information intermediary that aggregates multiple exchanges and independent deposit and withdrawal projects to achieve liquidity sharing in transaction matching. Fund aggregators have three main characteristics:

• They only act as intermediaries providing quotes, and all transactions are conducted through third-party suppliers.

• They do not require remittance licensing because users undergo identity verification through third-party suppliers.

• In addition to fiat deposit and withdrawal, they can also provide functions such as DEX aggregators, liquidity staking, and NFT markets. Fund aggregators mainly target retail investors and do not provide payment solutions for merchants.

6. Cryptocurrency Debit Card

The main advantage of a cryptocurrency debit card is that it allows for everyday spending using cryptocurrencies. In traditional consumer scenarios, it is difficult to achieve this unless merchants directly accept cryptocurrencies. Cryptocurrency debit cards are increasingly accepted by users in the crypto community, allowing for direct cryptocurrency spending or convenient conversion of cryptocurrencies into fiat currencies stored in the card, enabling global payments and consumption.

• A cryptocurrency debit card is equivalent to a secondary account issued by a centralized exchange and is one of the customer services provided by centralized exchanges. The cryptocurrency-related steps in the deposit and withdrawal process are handled by the centralized exchange (without the need for additional remittance licensing), while the payment processing for fiat currencies is handled by payment network providers. The fees for cryptocurrency debit cards are often higher than those of centralized exchanges because users need to pay additional exchange fees to the payment network provider. Users can use cryptocurrency debit cards to pay merchants in fiat currency for goods and services, so cryptocurrency debit cards can only be used as a fiat withdrawal channel. It is important to note that using a cryptocurrency debit card for payment may incur capital gains tax, and cryptocurrency must be pre-deposited in the card before use.

• Using a cryptocurrency debit card also has the following advantages:

• Fund security: Funds deposited into the card are operated by the bank, eliminating concerns about the source of funds and card freezing. Physical cards support ATM withdrawals. In the actual consumption process, fiat currency is directly spent, not cryptocurrency assets.

• Cross-border payments: Most cryptocurrency debit cards are Visa or Mastercard, supporting cross-border payments and can be used at millions of online and offline merchants worldwide.

• Consumer rebates: Most cryptocurrency debit cards offer consumer rebates, which are returned to users in the form of cryptocurrencies.

Security and Compliance Issues

Now that we have learned about the common methods of fund deposit and withdrawal, which one do you usually use? Different types of fund deposit and withdrawal methods have their own advantages, but what we are more concerned about is the legality and security of funds and transactions. Due to the different regulations between major countries, there is still room for non-compliant fund deposit and withdrawal methods, and various methods such as money laundering, tax evasion, and fraud are not uncommon. Users who fall victim to scams or theft, frozen funds and bank cards, or being visited directly by relevant authorities, are often deeply distressed and anxious.

To minimize the risks of deposit and withdrawal, users themselves need to strengthen their security awareness, learn more about blockchain knowledge, pay attention to the protection of private key passwords, and try to use large-scale platforms with licensing certification for transactions, etc. Large institutions such as exchanges should also strengthen their compliance management, cooperate with regulation, obtain the necessary compliance licenses to provide guarantees for users’ transactions. Next, let’s understand the legal requirements for various types of financial licenses in different regions.

Legal Requirements in Different Regions

The unique innovation of cryptocurrencies makes their attributes difficult to define, and most regions do not yet have comprehensive regulatory frameworks. Currently, the legal licenses related to deposit and withdrawal can be divided into the following two categories:

• Focus on payment and currency circulation permits, such as the remittance license in the United States, and VASP in the European Union;

• Professional virtual asset service provider licenses, which will be the future trend.

In the United States, the scope of applying for a remittance license (MTL) includes international remittances, foreign exchange, currency transactions/transfers, ICO issuances, prepaid projects, issuance of travel checks, etc. It can be considered that institutions related to currency services are covered.

To apply for this license, the deposit and withdrawal project needs to register as a money service provider with the Financial Crimes Enforcement Network (FinCEN), and then apply for the remittance license in the operating state. The application is based on a registration permit system and needs to be rechecked every two years. Due to the ambiguous nature of cryptocurrencies, deposit and withdrawal projects are more or less regulated by the U.S. Securities and Exchange Commission (SEC) or the Commodity Futures Trading Commission (CFTC).

Compared to the United States, the cryptocurrency regulatory systems in the European Union and the United Kingdom are more comprehensive. Deposit and withdrawal projects need to register as virtual asset service providers (VASP) in these regions. In addition, all exchanges, mining pools, wallet providers, custody service providers, and decentralized applications also need this license. Registering as a virtual asset service provider in one country in the European Union allows businesses to operate throughout the entire EU region. Lithuania, an EU member state, has the most relaxed cryptocurrency regulatory policy in the EU. The license can be obtained in as little as one month, and there is no expiration date for the license. The minimum authorized capital is only 2,500 euros, and there are no requirements for local personnel structure. Many centralized service providers hold this license, such as Binance, BIT, Huobi, HyperBC, etc.

In Hong Kong, cryptocurrencies are classified as security tokens and non-security tokens. Therefore, operating virtual currencies legally in Hong Kong requires applying for dual licenses. According to different regulatory authorizations, the Securities and Futures Commission of Hong Kong regulates security token transactions conducted by virtual asset exchanges under the Securities and Futures Ordinance (License Type 1 + License Type 7). It also regulates non-security token transactions conducted by virtual asset exchanges under the Anti-Money Laundering Ordinance (VASP license). On August 3rd, HashKey and OSL obtained an upgraded license from the Securities and Futures Commission of Hong Kong for License Type 1 (Securities Trading) and License Type 7 (Providing Automated Trading Services). They are allowed to engage in retail cryptocurrency business in Hong Kong and become the first batch of licensed institutions since the new regulatory requirements for retail digital asset trading in Hong Kong took effect on June 1, 2023.

Status of Obtaining Compliance Licenses for Deposit and Withdrawal

In countries or regions where the regulatory policies for exchanges are clear, obtaining a license means that an institution is under the supervision of the local government and can legally operate cryptocurrency businesses. Users can deposit funds using fiat currency payment methods, and their assets and information are better protected. At the same time, the number and quality of licenses also reflect the confidence and determination of institutional exchanges for future investments. Considering the current industry landscape, the following four mainstream exchanges belong to the first tier in terms of the quality and quantity of licenses:

Binance

As the world’s largest exchange, although Binance has not disclosed its headquarters location, it has been making efforts in security and compliance to bridge the gray areas and actively embrace regulation and compliance. In 2022, Binance achieved fruitful results in compliance promotion in the European Union, the Middle East, and North America. It obtained compliance licenses and permits from three G7 countries (the United States, France, and Italy) and three regions in the Middle East (Dubai, Abu Dhabi, and Bahrain). However, overall, Binance focuses more on relatively remote areas and small countries, setting up local fiat currency exchanges and establishing good relationships with local regulatory authorities.

In 2023, there are several points worth noting: first, Binance obtained a digital asset operator license in Thailand, which is its first license in Southeast Asia, indicating the expansion of its legalized layout in Southeast Asia; second, the regulatory lawsuit brought by the SEC against Binance US caused a major turmoil in the crypto industry and significantly strengthened regulatory supervision of cryptocurrency compliance and security in the United States; third, Binance’s global compliance progress fell short of expectations, as it has not yet obtained a cryptocurrency operating license in Hong Kong, and the progress is unclear. The regulatory tightening following the FTX incident has also affected its multiple layouts in Europe, leading to frequent issues in various regions.

OKX

It is reported that the veteran cryptocurrency exchange OKX has obtained operating licenses from the US MBS, the Philippine government’s virtual currency exchange, the Japanese cryptocurrency trading platform, the MVP preparatory license of Dubai’s VARA, and the temporary virtual asset license in the United Arab Emirates. It also has legal operation licenses in France and the Bahamas.

OKX is headquartered in Seychelles, with its operating entity in Hong Kong. Its team started preparing for a legal operating license in Hong Kong a year ago and established a dedicated team of over 20 people to handle compliance procedures in Hong Kong. Lennix, the Global Chief Business Officer of OKX, stated that OKX is expected to submit audit results in September, but the specific approval and the time to obtain the license will depend on the response from the Hong Kong Securities and Futures Commission. However, this does not affect the smooth operation of OKX’s business in Hong Kong before obtaining approval.

Coinbase

Coinbase, the leading exchange born in the United States, is the first licensed Bitcoin exchange in the country. The team places great emphasis on compliance work, maintains close contact with the government, and holds a BitLicense from the New York State Department of Financial Services as well as a trust license. It also has MTL licenses in various states in the United States, as well as electronic money service licenses from the UK FCA and the Central Bank of Ireland. Due to the need for compliance listing, the company has not issued any platform tokens or engaged in higher-risk derivative businesses. On April 14th of this year, Coinbase successfully went public on Nasdaq, becoming a milestone in the development of Bitcoin and other digital assets, and also allowing other exchanges to see the benefits of focusing on compliance.

However, even Coinbase, which is known for its compliance focus as a US-based company, has been sued by the SEC following Binance. Coinbase has been accused of illegally operating as a national exchange, broker, or clearing agency without registering. Just half a year ago, Coinbase was fined $50 million by the New York State Department of Financial Services (NYDFS) for violating New York banking law and the department’s compliance plan.

Huobi

As another veteran exchange, Huobi has been continuously strengthening its compliance process since 2018. It holds a US MSB license, a distributed ledger technology (DLT) license from Gibraltar, a digital asset exchange license issued by the Thai Ministry of Finance, and its subsidiary BitTrade has a legal license in Japan. It also operates exchanges in Dubai and Australia. Overall, its licenses are mainly concentrated in tax havens, with a focus on being small but refined.

In response to the license application in Hong Kong, Huobi has been preparing for it. In May, Huobi launched a new exchange, Huobi Hong Kong. Sun Yuchen, a member of Huobi’s global advisory committee, said that Huobi submitted its application for a virtual asset service provider (VASP) at the end of May, which includes an 18-month grace period. The regulatory agency can approve or reject the application, but Huobi is expected to obtain a cryptocurrency trading license in Hong Kong as early as the end of this year.

Conclusion

With the continuous growth of the cryptocurrency market and the increased regulatory efforts resulting from the FTX incident last year, the introduction of legality and compliance has become more and more frequent in our sight. The acquisition of legal operating licenses by major exchanges not only allows cryptocurrency economic activities to enter the public’s view legally, but also demonstrates the comprehensive strength of the exchanges and their determination and confidence in the future. However, the most important aspect is to provide trading protection for users, becoming a solid cornerstone of confidence in the cryptocurrency market. We also hope to see that with the compliance of the cryptocurrency market, good coins can drive out bad coins, so that we can go further and last longer together.