A Brief Discussion on the Practice and Risks of Encryption Asset Management Business from the Perspective of MiCA Licensed Entities

Compliance insights in the era of MiCA

As traditional financial capital continuously flows into the crypto market, more and more investors are seeking stable and reliable crypto asset investment management services. Especially those who are already weary of watching market trends every day and trying various new strategies, they are eager to plan their crypto asset portfolio through a more traditional investment management context.

The EU “Markets in Crypto-Assets Regulation” (Regulation (EU) 2023/1114, referred to as MiCA) is the world's first unified regulatory framework for crypto assets. It not only imposes comprehensive requirements on exchanges, wallet service providers, etc., but also incorporates innovative businesses such as portfolio management, copy trading, and staking into the regulatory system for the first time.

Under the MiCA framework, several cryptocurrency service providers have obtained regulatory licenses and begun offering services such as portfolio management to clients. To date, there are 10 licensed institutions in the EU that assist clients in managing cryptocurrency asset portfolios, including large platforms like eToro and Kraken. eToro provides users with asset allocation advice through its Smart Portfolios feature and implements strategy replication through a social trading model, attracting a large number of users seeking automated and low-threshold investments. Kraken, on the other hand, has expanded its staking services based on cryptocurrency trading and is exploring compliant cross-border asset management models.

The enactment of MiCA has brought these innovative businesses into a unified regulatory framework for the first time. This change not only affects the European market but also provides a compliance “barometer” for global cryptocurrency enterprises: in the future, all service providers involved in portfolio management, staking, or copy trading must directly address regulatory challenges. For cryptocurrency platforms, fund managers, and even individual investors, this means two real issues:

1. How to continue innovating under the premise of Compliance?

2. How to cope with cross-border regulatory differences to ensure the sustainability of global business expansion?

Copy Trading and Quantitative Strategies

MiCA provides a clear definition and requirements for Portfolio Management: Any CASP offering cryptocurrency asset portfolio management must conduct a suitability assessment of the client's experience, knowledge, investment objectives, and ability to bear losses before providing services. If the client fails to provide relevant information, or if the assessment results indicate that the investment is not suitable for the client, the service provider must not offer portfolio management or related advice.

At the same time, when providing investment advice, CASP should issue a report that includes a suitability assessment, explaining how the recommended crypto assets or services align with the client's preferences and goals; while providing portfolio management, CASP must also regularly issue reports to clients summarizing portfolio performance and updating the suitability assessment. This regulation directly raises the compliance threshold for Portfolio Management and strengthens investor protection.

In the field of cryptocurrency asset investment, copy trading and quantitative strategies have gradually become common portfolio management methods among MiCA licensed CASPs. These two strategies enhance investment efficiency and potential returns through technological means, attracting a large number of investors who hope to achieve asset appreciation by leveraging technological advantages.

Copy Trading, as the name suggests, allows investors to follow the investment strategies of experienced traders. The platform provides transparent trading signals and historical performance, enabling users to choose and replicate the strategies of professional traders. Its core feature is the direct connection between investors and seasoned traders, where investors automatically copy every action of the trader through the platform, thereby lowering the investment threshold. This type of service is particularly suitable for investors who lack professional knowledge but wish to benefit from the experiences of others.

Algorithmic Trading refers to the use of mathematical models and statistical methods for data analysis, and the automatic execution of trading decisions through algorithms. In the cryptocurrency market, quantitative strategies often combine big data, machine learning, and artificial intelligence technologies to achieve high-frequency, automated investment operations. Compared to manual trading, quantitative strategies execute decisions quickly and with strong discipline, allowing for prompt objective responses that are “contrary to human nature” in rapidly changing market environments, thus reducing biases in human judgment. As a result, it has gradually become an important product type offered by MiCA licensed CASPs for investors.

It is worth noting that MiCA does not explicitly require the underlying asset types for portfolio management to be crypto asset spot or derivatives. Although in practice, many platforms may choose crypto spot as the underlying asset, especially due to its transparency and relatively manageable risks, the use of derivatives (such as futures, options, etc.) as underlying assets is not explicitly distinguished by MiCA regulatory requirements. When the underlying assets involve crypto derivatives, there may be competitive and cooperative issues between crypto regulation (such as MiCA) and traditional financial regulation (such as MiFID).

MiCA establishes compliance requirements for Portfolio Management and references MiFID standards in certain aspects, particularly in suitability assessments and investor protection. However, the regulatory scope of MiFID is not explicitly limited to fiat derivatives, and some crypto derivatives may also fall under the definition of financial instruments in MiFID, thus requiring compliance with both MiCA and MiFID. This dual regulation may present compliance challenges, particularly where there may be overlaps or differences in product compliance assessments, capital requirements, and derivatives trading rules.

Although there are differences in the ways both achieve investment objectives, they face challenges and opportunities in terms of Compliance. The following will explore the regulatory requirements for copy trading and quantitative strategies by taking two representative jurisdictions with strict Compliance as examples.

1.EU (MiCA)

In the European Union, MiCA proposes detailed requirements for CASP as a unified regulatory framework, with a particular focus on investor protection. For service providers in Portfolio Management, the core requirements include:

• Suitability Assessment Obligation: Before providing advice or portfolio management, a suitability assessment must be conducted for each client, covering knowledge and experience, investment objectives/risk tolerance, financial situation, and basic understanding of the risks associated with crypto assets; portfolio management may only begin if the client is deemed “suitable.” If the client fails to provide information or the assessment is not suitable, portfolio management must not commence. Clients must be re-evaluated at least every two years.
• Periodic Reporting Obligations: At least quarterly, provide clients with periodic reports on portfolio management (in electronic form; clients with “online systems” and access records for the current quarter can fulfill this through the “online continuous availability + reminder” mechanism), which must fairly and balancedly review portfolio activities and performance, and update suitability information.
• Transparency obligation for cost and fees disclosure: Assess the “cost and complexity of equivalent products” under the adaptability framework, and clearly disclose all associated fees and third-party interests.
• Market Fairness: MiCA requires platforms not to manipulate market prices through algorithms or replication mechanisms, and must maintain fairness and transparency.

2. United States (SEC and CFTC)

In the United States, the regulation of copy trading and quantitative strategies is jointly undertaken by the SEC and CFTC, mainly reflected in:

• Registration and Compliance: Copy trading/mirroring or model-driven strategies, if they constitute providing clients with advice on securities or discretionary trading on behalf of clients, typically fall under the category of investment advisers as defined by the Investment Advisers Act of 1940, and require compliance obligations such as registration, fiduciary duties, and disclosures. Quantitative/algorithmic trading involving commodity derivatives is subject to the CEA and CFTC regulatory framework, and whether it triggers CTA/CTP/FCM identities depends on the specific business.
• Risk and Suitability Disclosure: The SEC emphasizes the need for full and non-misleading disclosure regarding “algorithmic/robotic investment advisors” (model assumptions, data and limitations, backtesting and performance presentation, risks of deviating from client goals, etc.) and the fulfillment of fiduciary duties, making this a key focus in inspections.
• Anti-Market Manipulation: Both the SEC and CFTC prohibit the use of copy or algorithmic trading to manipulate markets or engage in insider trading. The CFTC prohibits manipulation and fraudulent devices under CEA §6©(1) and 17 CFR 180.1/180.2; on the SEC side, an anti-manipulation/anti-insider framework is proposed under Exchange Act §10(b)/Rule 10b-5, §9(a)(2), etc.

Legal risks under technological innovation

As the cryptocurrency asset market continues to mature, staking has become one of the core services provided by mainstream cryptocurrency platforms as an important component of blockchain network validation mechanisms. Staking essentially involves cryptocurrency holders locking their assets on the blockchain to support the operation of the network and earning rewards through this process.

Many mainstream cryptocurrency service platforms such as Kraken, Binance, and Coinbase offer staking services that allow users to invest their crypto assets in the network to earn staking rewards. Staking has significant financialization characteristics, making it an important focus for compliance construction in various jurisdictions. For example, after being ordered by the U.S. SEC to cease staking services in 2023, Kraken underwent a large-scale reform of its staking business, increasing user authorization processes, independently custodianing user assets, and standardizing the reward disclosure methods to ensure that its staking services comply with regulatory requirements. There are considerable differences in the regulatory status of staking across different jurisdictions:

1. Differences in the Legal Recognition of Staking

The recognition of staking services varies greatly across different jurisdictions:

• EU: MiCA classifies staking services as ancillary to custodial services. Cryptocurrency staking service providers must obtain authorization to provide custodial and management services for cryptocurrency assets on behalf of clients and are liable for any losses of cryptocurrency assets incurred due to the provision of staking services to clients or due to the staking activities themselves.
• United States: The SEC conducts case-by-case assessments of staking operations based on the Howey Test. It focuses on whether the staking business involves factors such as intermediaries bundling, profit promises, and expectations of consideration, tending to view staking as an “investment contract” and thus requires relevant services to be registered.
• Singapore: Providing staking services to the public typically falls under the DPT (Digital Payment Token) service provider framework (PSA/FSMA). Regardless of whether customers are overseas or not, service providers must be licensed and comply with strict AML/CFT, client asset custody, and disclosure requirements. There is no transition period, and unlicensed entities must cease operations.
• Hong Kong: Clearly integrating staking business into the regulatory framework. Licensed Virtual Asset Trading Platforms (VATP) are allowed to provide staking services to clients with prior approval, but must comply with a full set of terms and conditions (Staking T&Cs), covering custody and control, customer authorization and disclosure, risk control, and operational requirements.

This difference requires that cross-border staking operations must adhere to the “strictest standard first” principle in their design, otherwise they may be deemed non-compliant in certain countries.

2. Core Elements of Staking Compliance

To reduce compliance risks, the staking platform should focus on the following three aspects:

• Independent Custody of Client Assets: Prevents the platform from mixing client pledged assets with its own funds; ensures that client assets can be fully returned in the event of bankruptcy or liquidation.
• Transparent reward allocation mechanism: Disclose reward calculation methods, distribution frequency, potential revenue fluctuations, and establish on-chain verifiable data records.
• Risk Warning and User Education: Clearly identify the risks that may occur during the staking process, such as network attacks, contract vulnerabilities, and policy changes, and provide retail users with risk questionnaires and educational materials.

However, it is precisely due to the strict attitude of regulatory authorities towards staking services that licensed cryptocurrency platforms are generally cautious when providing staking services. Many platforms choose to avoid or strictly limit the scope of staking services to comply with the compliance requirements of different markets.

Case Insight: Kraken's Staking Rectification

After facing SEC enforcement in 2023, Kraken reformed its staking business: it added a user authorization process to ensure users understand staking rules; transferred staking assets to an independent trust account; standardized reward disclosures, providing a real-time yield calculation model. In January 2025, Kraken announced the relaunch of its staking business in 37 states and 2 territories in the United States. This case demonstrates that staking Compliance involves not just registration, but also business structure reconstruction, risk management system upgrades, and ongoing regulatory communication.

The core idea of the compliance path is ###.

In the face of a constantly changing global regulatory environment, cryptocurrency companies need to find a balance between different markets when formulating compliance pathways. The following three key principles help companies find the right direction within the complex compliance system.

1. Strictest Jurisdiction First: Starting with the United States and the European Union

Companies should first refer to the strictest regulatory standards globally, such as the regulatory requirements of the United States and the European Union. This is particularly evident in Kraken's strategy. As a globally renowned digital asset exchange, Kraken has adopted compliance measures based on the regulatory requirements of the EU and the US, gradually expanding into other markets. This not only helps Kraken avoid potential legal risks arising from “regulatory arbitrage” but also ensures legal operations in multiple markets.

Through strict compliance measures, Kraken is able to provide investors with a transparent and secure trading environment, while avoiding the risks of regulatory penalties or market bans that other platforms face due to neglecting regulatory requirements (such as Binance). This strategy allows Kraken to operate smoothly in multiple jurisdictions and gradually expand its global market share.

2. Modular Compliance Framework: Designing Compliance Measures by Business

Modular processing of business operations for cryptocurrency asset enterprises is an important method to address complex regulatory requirements. For example, Kraken separates its services such as staking, trading, and lending, designing independent compliance measures for each business. For instance, when providing staking services, Kraken has established interest rate disclosure and risk warning mechanisms that comply with EU and US regulations to ensure that customers understand the associated risks while enjoying returns.

In addition, platforms like OKX also decompose the compliance requirements of various business lines in a similar manner, ensuring that each module has an independent regulatory framework. Through this approach, crypto asset companies can not only improve compliance efficiency but also respond flexibly in a complex regulatory environment.

3. Continuous Compliance and Dynamic Adjustment: Real-time Update of Compliance Manual

Compliance management is not a one-time effort; as the global regulatory environment changes, companies need to regularly update their compliance manuals to ensure all operations comply with the latest regulations. Kraken's practices in this regard are worth emulating; the platform establishes a compliance committee to regularly review global regulations, ensuring that every aspect of the company's operations aligns with local laws.

In contrast, cases like FTX remind us that a lack of dynamic Compliance updates will leave companies unprepared when facing regulatory changes, resulting in serious legal and financial consequences.

How to pave the way for Compliance? ###

As traditional financial capital gradually flows into the crypto market, many investors are starting to seek more stable and secure investment methods rather than just following market trends. Especially in the context of increasing regulation, the Compliance path has become more important. For companies to establish a foothold in this emerging market, they must first ensure compliance with the regulatory requirements of their region and choose suitable investment management models based on these requirements.

For businesses, the key moving forward is to find suitable service providers and partners, ensuring Compliance while maximizing return on investment. If your business intends to enter the cryptocurrency space, understanding different regulatory frameworks and Compliance requirements will help achieve sustainable development in a complex market environment.