Investment Must-Read Guide How Much Do You Know About Deposits and Withdrawals, Compliance and Safety Are Most Important

Looking back at the major events in the cryptocurrency industry over the past year, FTX’s bankruptcy brought about tighter cryptocurrency regulations, the Hong Kong hotspot emphasized the importance of compliance licenses for fiat currency deposits and withdrawals, the SEC sued centralized exchange giants Binance and Coinbase, and governments around the world have been strengthening their focus on and implementing stricter regulations in the fiat currency deposits and withdrawals market.

Using fiat currency to purchase cryptocurrencies is usually the first step for most users to enter the Web3 world. Regardless of the method used for deposits, users’ funds and accounts should be secure, and the trading methods and platforms need to be legal and compliant. The project party needs to obtain a remittance license locally and verify the user’s identity in order to provide financial services such as deposits and withdrawals.

This article will focus on the types of projects for fiat currency deposits and withdrawals in the cryptocurrency market, regional legal regulatory requirements, and the situation of obtaining regulatory licenses by major exchanges.

Types of Projects for Fiat Currency Deposits and Withdrawals

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

The first difference lies in the place. On-exchange trading is usually conducted on a centralized exchange as the venue, similar to traditional stock exchanges. OTC trading, on the other hand, does not take place in a fixed location, but rather occurs through various means, such as face-to-face transactions, WeChat, etc.

The second difference lies in the objects of deposits and withdrawals. For on-exchange trading, the objects of deposits and withdrawals are the exchange itself. Users deposit fiat currency to the exchange, which is called a deposit, and withdraw fiat currency from the exchange, which is called a withdrawal. For OTC trading, the objects of deposits and withdrawals are other users. User A deposits fiat currency to another user B, which is considered a deposit, and user A receives fiat currency from another user C, which is considered a withdrawal.

1. Over-the-counter (OTC) Trading

OTC trading allows direct transactions between buyers and sellers, eliminating intermediaries. It is also a high-risk area for fraud, and there are two models:

OTC Desks, such as Kraken OTC. In the OTC desk model, the two parties involved in the transaction are the customer in need of trading services and the OTC desk as the counterparty. This model has three main advantages for deposits and withdrawals:
- No transaction slippage. By providing fixed quotes for large transactions to avoid losses caused by slippage, the OTC desk takes on the risk and has the possibility of making profits from better-than-quoted prices.
- More liquidity. OTC desks can execute trades at the best prices on multiple liquidity platforms.
- High privacy. By directly trading with an OTC desk, customers can protect their privacy and avoid their trading information appearing in public order books.
Customer-to-customer (C2C), such as OKX C2C Trading. This refers to direct transactions between individuals for fiat currency deposits and withdrawals, without intermediaries or third parties. OKX holds the digital asset of the buyer/seller until confirmation of payment/receipt by the other party. The platform recommends that users trade with certified merchants, as all certified merchants have undergone thorough scrutiny by OKX. The advantages of C2C trading are as follows:
- Support for multiple payment methods. Buyers and sellers can define any payment method they prefer, and as long as the transaction is confirmed as genuine, the payment/receipt can be completed.
- Low trust cost. Both parties involved in the transaction must pass the platform’s identity verification, and even stricter merchant certification review. The platform also publicly discloses users’ trading information as a reference for creditworthiness, although it cannot avoid the risk of delayed or canceled orders from counterparties.
- 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, thus bypassing the bank’s restrictions.

However, such transactions are completely privately matched to avoid high intermediary fees, except when introduced by third-party platforms. Due to the imperfect trust mechanism and information asymmetry, private transactions between users often occur with higher risks.

2. Cryptocurrency ATMs

As physical machines, 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 a remittance license.

The biggest advantage of cryptocurrency ATMs is anonymity and privacy, as users can purchase cryptocurrencies with cash, and there are often no KYC procedures, although sometimes identification documents are required, but proof of residence and facial recognition are not necessary.

However, they support fewer types of cryptocurrencies, mainly BTC and ETH, and most ATMs do not provide withdrawal services. With high transaction fees, they are often considered the most cumbersome way to buy cryptocurrencies.

3. Centralized Exchanges (CEX)

Centralized exchanges are the most commonly used fiat currency deposit and withdrawal platforms. Exchanges naturally have licensing advantages, low fees, and support for a variety of cryptocurrencies. They are also the largest liquidity providers in the ecosystem. Retail investors can freely deposit and withdraw funds through custodial wallets, while merchants often deploy 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 custodied by the same exchange, there are no fees for transactions, as the funds are simply 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, and 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 vertically oriented and mainly focus on the use of fiat currency deposit and withdrawal.

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

A simple and user-friendly interface. The minimalistic interface directly displays the fiat currency amount and the corresponding amount of cryptocurrency. Users only need to verify their identity for large transactions, making it user-friendly for small deposit and withdrawal users.
High privacy. Most projects only support self-hosted wallets, eliminating the need to transfer cryptocurrencies from custodial wallets and minimizing the use of other wallet information by users.
Most projects allow cooperating distributors to set distribution bonuses through SDKs, giving distributors control over profits, while the profit sharing of centralized exchanges is not as clear-cut.

5. Deposit and Withdrawal Aggregator

A deposit and withdrawal 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 category is essentially an information intermediary that aggregates multiple exchanges and independent deposit and withdrawal projects to achieve liquidity sharing through transaction matching. The deposit and withdrawal aggregator has three main characteristics:

Acts only as an intermediary providing quotes, with all transactions conducted through third-party vendors.
Does not require remittance licensing because users are verified through third-party vendors.
In addition to fiat deposit and withdrawal, it can also provide functions such as DEX aggregator, liquidity staking, and NFT marketplace. The deposit and withdrawal aggregator is mainly targeted at retail investors and does not provide payment solutions for merchants.

6. Cryptocurrency Debit Card

The main advantage of a cryptocurrency debit card is that it allows for everyday consumption using cryptocurrency. In traditional consumer scenarios, it is difficult to achieve this unless the merchant directly accepts cryptocurrency. Cryptocurrency debit cards are increasingly accepted by users in the crypto community, allowing for direct cryptocurrency spending or convenient conversion of cryptocurrency into fiat currency 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 aspects of the deposit and withdrawal process are handled by the centralized exchange (no additional remittance licensing is required), while the payment processing for fiat currency 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 providers. 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 should be noted that using a cryptocurrency debit card for payment may incur capital gains tax, and cryptocurrency needs to be pre-deposited into the card before use.
There are also the following advantages to using a cryptocurrency debit card:
- Fund security: Funds deposited into the card are managed by the bank, so there is no need to worry about the source of funds or card freezing. Physical cards support ATM withdrawals. In actual consumption process, fiat currency is directly consumed, 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 locations worldwide.
- Consumer rebates: Most cryptocurrency debit cards support consumer rebates, which are returned to users in the form of cryptocurrency.

Security and Compliance Issues

Now that we have learned about several common deposit and withdrawal methods, which one do you often use? Each type of deposit and withdrawal method has its advantages, but what we are more concerned about is the legal and security issues of funds and transactions. Due to different regulations among major countries, there is still room for non-compliant deposit and withdrawal in the market, and various means such as money laundering, tax evasion, and fraud are frequently seen. Users suffer from scams, thefts, frozen funds, and direct visits from relevant authorities, causing great distress and anxiety for ordinary users.

To minimize the risks of deposits and withdrawals, in addition to users themselves needing to strengthen their security awareness, learn more about blockchain knowledge, pay attention to the management of private key passwords, and try to use large platforms with license certification for transactions. Exchanges and other large institutions should also strengthen their compliance management, cooperate with regulation, obtain the necessary compliance licenses for providing services, and provide security 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. Current legal licenses related to deposits and withdrawals 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.

Applying for a remittance license (MTL) in the United States can cover a wide range of subjects, including international remittances, foreign exchange transactions, currency trading/transfer, ICO issuance, prepaid projects, and issuing traveler’s checks. Institutions related to currency services can be considered as part of this category.

To apply for this license, deposit and withdrawal projects need to register as a money services business with the Financial Crimes Enforcement Network (FinCEN), and then apply for a remittance license in the operating state. The application follows a registration and licensing 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 complete. Deposit and withdrawal projects need to register as a virtual asset service provider (VASP) license. In addition, all exchanges, mining pools, wallet providers, custodians, and decentralized applications also require this license. Registering as a virtual asset service provider in one EU country allows the business to be conducted throughout the EU. Lithuania in the European Union has the most relaxed cryptocurrency regulatory policies, where licenses can be obtained in as quickly as one month, and the licenses have no expiration date. The minimum authorized capital is only 2500 euros, and there are no requirements for local personnel structure. Many centralized service providers hold this license, such as Binance, BIT, Huobi, and HyperBC.

In Hong Kong, cryptocurrencies are classified as security tokens and non-security tokens, so 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). At the same time, 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 to operate as 1 (securities trading) and 7 (automated trading service) licenses. They are allowed to engage in cryptocurrency retail business in Hong Kong, becoming the first batch of institutions to obtain licenses since the new regulatory requirements for retail digital asset trading in Hong Kong came into effect on June 1, 2023.

Status of Obtaining Compliance Licenses for Deposits and Withdrawals

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 currencies, and their assets and information are highly protected. At the same time, the number and quality of licenses also reflect the confidence and determination of institutional exchanges for future investments, and play an important role in expanding their promotional effects and strengthening user confidence based on the current comprehensive strength of the institutions and exchanges. From 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 largest global exchange, although its headquarters is not explicitly stated, it has been making efforts in security and compliance to bridge the gray areas and actively embrace regulation and compliance. In 2022, Binance made significant progress in compliance in the European Union, the Middle East, and North America, obtaining compliance licenses and permits from three G7 countries (the United States, France, Italy) and three regions in the Middle East (Dubai, Abu Dhabi, Bahrain). However, overall, Binance focuses more on relatively remote regions and small countries, establishing local fiat 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 Binance’s first license in Southeast Asia, indicating the launch of Binance’s legalization layout in Southeast Asia; second, the regulatory lawsuit brought by the SEC against Binance US caused a major upheaval in the cryptocurrency circle, greatly strengthening the SEC’s regulatory oversight of cryptocurrency compliance and security in the United States; third, Binance’s global compliance fell short of expectations, as it has not yet obtained a cryptocurrency operating license in Hong Kong and the progress is unclear. The original multi-layout in Europe has also been tightened by regulators after the FTX incident, with problems arising in various regions.

OKX

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

OKX is headquartered in Seychelles, with its operating entity in Hong Kong. Its team has been preparing to apply for a legal operating license in Hong Kong a year ago and has formed a dedicated team of more than 20 people responsible for Hong Kong’s compliance procedures. Lennix, the Chief Business Officer of OKX Global, stated that OKX is expected to submit audit results in September, but the specific approval and the time to obtain the license still depend on the response of the Hong Kong Securities and Futures Commission at that time. However, this does not affect the smooth operation of OKX’s business in Hong Kong before approval is obtained.

Coinbase

Coinbase, the leading exchange born in the United States, is the first licensed Bitcoin exchange in the country. The team attaches great importance to compliance work and maintains close contact with the government. It holds the BitLicense license in New York State and the 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 and has not engaged in higher-risk derivative businesses. It wasn’t until April 14th of this year that Coinbase successfully went public on the Nasdaq, becoming a milestone in the development of Bitcoin and other digital assets, and also allowing other exchanges to see the dividends of compliance.

However, even Coinbase, which is known for its compliance standards as a US-born company, has been sued by the SEC following Binance, accusing Coinbase of illegally failing to register as a national exchange, broker, or clearinghouse. 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 compliance plan of the New York State Department.

Huobi

As another veteran exchange, Huobi has been continuously strengthening its compliance process since 2018. It has the MSB license in the United States, the distributed ledger technology (DLT) license in Gibraltar, the digital asset trading license issued by the Thai Ministry of Finance, and its holding company BitTrade has a legal license in Japan. It also operates exchanges in Dubai and Australia. In general, the licenses are mainly concentrated in tax havens, small but refined.

In the face of a license application in Hong Kong, Huobi has been preparing for it. In May, it also launched a new exchange called Huobi Hong Kong. Sun Yuchen, a member of the Huobi Global Advisory Committee, said that Huobi submitted the VASP application at the end of May, including an 18-month grace period. Regulatory agencies can approve or reject the application, but Huobi may 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 thanks to the impact of the FTX incident last year, the legal and compliant introduction is becoming more and more frequent in our sight. The acquisition of legitimate operating licenses by major exchanges not only allows crypto-economic activities to enter the public view legally but also demonstrates the comprehensive strength of the exchanges and their determination and confidence in the future. Most importantly, it provides trading protection for users and becomes 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, and let us go further and longer together.

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