China stunned cryptocurrency traders in September when, after announcing a crackdown on ICOs, it went a step further and warned all crypto exchanges operating in mainland China that they would need to wind down their operations by October - effectively killing the nascent cryptocurrency and blockchain industry.

Observers expected this to be a huge blow...though Chinese trading volume had already fallen dramatically since January 2017 when authorities forced local exchanges to raise fees and implement AML controls, it was still a crucial market for bitcoin. However, the drop in Chinese trading didn’t stop the pioneering cryptocurrency from rocketing to an all-time high around $20,000 a few months later.

As we noted at the time, several of the largest China-based exchanges, from OKCoin to Binance.com, and wallet services too sought a second life in friendlier Asian jurisdictions, applying for licenses in Japan - solo or via partners - setting up over-the-counter shops in Hong Kong, or laying the groundwork to operate from Singapore and South Korea.

But crypto enthusiasts living in mainland China can still transact domestically: But instead of these transactions being routed through exchanges, they’re negotiated on over-the-counter (OTC) trading platforms like Huobi, OKEx and OTCBTC, according to a Yahoo Finance report.

Of course, Chinese buyers who still want to participate in the market are doing so at significantly higher prices. On OTC platforms, prices are 10% to 20% higher than the prices on traditional exchanges. On Jan. 18, when bitcoin was trading at $11,730 on Coinbase, the biggest US brokerage, the lowest price on the Huobi OTC platform was 84,000 yuan, or $13,085.

The premium that Chinese investors pay is a direct result of the limited OTC coin supply caused by government regulations. For more sophisticated traders, there’s an arbitrage opportunity: Traders will buy cryptocurrencies cheaply on foreign exchanges and immediately sell on domestic OTC platforms at a higher price. But there are risks, including price volatility, slow transaction times and China’s strict control on capital outflows.

On platforms like OTCBTC, buying cryptocurrencies is like shopping on Ebay: choose the coin you want, then offers from multiple sellers appear. Buyers can link their bank accounts or use popular mobile payment methods like Alibaba’s Alipay or Tencent’s WeChat Pay. Once they get their hands on the coins, investors can trade them on any exchange in the world.

Chart showing number of daily transactions on OTCBTC

As we highlighted in November, several China-based trading platforms, including Huobi and OKEx, which were among the largest exchanges in the world and were included in the ban, decided to take advantage of a loophole: China hadn’t outlawed cryptocurrencies, it just outlawed the operation of exchanges. So, many of the companies that decided to stay soon opened OTC platforms and promoted their new operations by waiving transaction fees.

According to Yahoo Finance, while it’s hard to measure the exact size of OTC trading across all platforms, one single seller at Huobi recorded more than 10,000 separate bitcoin transactions in the past month. Another Taiwan-based platform, OTCBTC, which now offers more than 40 cryptocurrencies, boasted $100 million in transactions in the first 50 days after it launched last October.

Meanwhile, Huobi and other Chinese companies are still operating crypto exchanges in friendlier, overseas markets.

"Now our focus is the overseas expansion," Huobi CEO Leon Li tells Yahoo Finance. "More than half of our newly-registered users are from outside China."

However, concerns about regulatory risks aren’t going away either. Huobi, for example, marks the reminder in red that buyers should not mention sensitive words like “BTC” or “bitcoin” in their bank transfers in order to reduce the likelihood of having the transaction blocked.