Authors: Huang Wenjing, Li Chenrui
Compliance Insights in the Era of MiCA
With traditional financial capital continuously flowing into the crypto market, more and more investors are seeking stable and reliable crypto asset investment management services. Especially for those who are tired of monitoring market trends daily and trying various new strategies, they are eager to plan their crypto asset portfolios through a more traditional investment management context.
The European Union's Markets in Crypto-Assets Regulation (Regulation (EU) 2023/1114, abbreviated as MiCA), as the world's first unified regulatory framework for crypto assets, not only imposes comprehensive requirements on exchanges and wallet service providers 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 crypto asset service providers have already obtained regulatory licenses and begun offering portfolio management services to clients. As of now, there are 10 licensed institutions in the EU helping clients manage crypto asset portfolios, including large platforms like eToro and Kraken. eToro provides users with asset allocation advice through its Smart Portfolios feature and combines social trading models to achieve strategy replication, attracting a large number of users seeking automated and low-threshold investments. Kraken, on the other hand, has expanded its staking services based on crypto asset trading and is exploring compliant cross-border asset management models.
The promulgation 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 "guideline" for global crypto asset companies: in the future, all service providers involved in portfolio management, staking, or copy trading must directly respond to regulatory challenges. For crypto asset platforms, fund managers, and even individual investors, this means two practical issues:
1. How to continue innovating under compliance requirements?
2. How to address cross-border regulatory differences to ensure the sustainability of global business expansion?
Copy Trading and Quantitative Strategies
MiCA has put forward clear compliance definitions and requirements for Portfolio Management: any CASP providing crypto 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 the assessment results indicate that the investment is unsuitable for the client, the service provider must not offer portfolio management or related advice.
At the same time, when providing investment advice, CASPs should issue a report that includes the suitability assessment, explaining how the recommended crypto assets or services align with the client's preferences and objectives; when providing portfolio management, CASPs 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 crypto asset investment, copy trading and quantitative strategies have gradually become common methods of Portfolio Management 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 leverage technological advantages for asset appreciation.
Copy Trading, as the name suggests, allows investors to follow the investment strategies of experienced traders. Platforms provide transparent trading signals and historical performance, allowing users to choose and replicate the strategies of professional traders. Its core feature is the direct connection between investors and experienced traders, enabling investors to automatically replicate every action of the trader through the platform, thereby lowering the investment threshold. This type of service is particularly suitable for investors lacking professional knowledge but wishing to share the experiences of others.
Quantitative Strategies utilize mathematical models and statistical methods for data analysis and automatically execute trading decisions through algorithms. In the crypto asset 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 trades quickly and with strong discipline, allowing for rapid objective responses in a rapidly changing market environment, thus gradually becoming an important product type offered by MiCA licensed CASPs to 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, there is no clear distinction in MiCA regarding the use of derivatives (such as futures, options, etc.) as underlying assets. When the underlying assets involve crypto derivatives, there may be competitive issues between crypto regulation (like MiCA) and traditional financial regulation (like MiFID).
MiCA stipulates 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; some crypto derivatives may also meet the definition of financial instruments under MiFID, thus requiring compliance with both MiCA and MiFID. This dual regulation may pose compliance challenges, especially where there may be overlaps or differences in product compliance assessments, capital requirements, and derivatives trading rules.
Despite the differences in how they achieve investment objectives, both face compliance challenges and opportunities. The following will explore the regulatory requirements for copy trading and quantitative strategies using two representative jurisdictions with strict compliance.
1. European Union (MiCA)
In the EU, MiCA, as a unified regulatory framework, imposes detailed requirements on CASPs, particularly focusing on investor protection. The core requirements for service providers in Portfolio Management 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 crypto asset risks; portfolio management can only begin if the client is "suitable." If the client does not provide information or the assessment is unsuitable, portfolio management must not commence. A re-evaluation of the client must be conducted at least every two years.
Regular Reporting Obligation: A periodic report on portfolio management must be issued to clients at least quarterly (in electronic form; if the client has an "online system" and has accessed it during the quarter, this can be fulfilled through an "online continuous availability + reminder" mechanism), which must "fairly and balanced" review portfolio activities and performance and update suitability information.
Cost and Fee Transparency Disclosure Obligation: An assessment of "the costs and complexity of equivalent products" must be conducted within the suitability framework, and all fees and third-party interests involved must be clearly disclosed.
Market Fairness: MiCA requires platforms not to manipulate market prices using algorithms or replication mechanisms, ensuring 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 advice about securities to clients or discretionary management, typically fall under the Investment Advisers Act of 1940, requiring registration, fiduciary duties, disclosures, and other compliance obligations. Quantitative/algorithmic trading involving commodity derivatives is subject to the CEA and CFTC regulatory framework, with whether it triggers CTA/CTP/FCM identities depending on the specific business.
Risk and Suitability Disclosure: The SEC emphasizes sufficient and non-misleading disclosures for "algorithmic/robotic advisors" (model assumptions, data and limitations, backtesting and performance presentation, risks deviating from client objectives, etc.) and fulfilling fiduciary duties, which are key focus areas during inspections.
Anti-Market Manipulation: Both the SEC and CFTC prohibit the use of replication or algorithmic trading to manipulate the market or engage in insider trading. The CFTC prohibits manipulative and fraudulent devices under CEA §6(c)(1) and 17 CFR 180.1/180.2; the SEC has proposed anti-manipulation/anti-insider frameworks under Exchange Act §10(b)/Rule 10b-5, §9(a)(2), etc.
Legal Risks of Technological Innovation
As the crypto asset market continues to mature, staking has become one of the core services offered by mainstream crypto asset platforms, serving as an important component of blockchain network validation mechanisms. Staking essentially involves cryptocurrency holders locking their assets on the blockchain to support network operations and earning rewards through this process.
Many mainstream crypto asset service platforms, such as Kraken, Binance, and Coinbase, offer staking services, allowing users to invest crypto assets into the network to earn staking rewards. Staking has significant financialization characteristics, making it a key focus of compliance construction across various jurisdictions. For example, after being ordered by the SEC to cease staking services in 2023, Kraken undertook a large-scale overhaul of its staking business, increasing user authorization processes, independently custodian user assets, and standardizing reward disclosure methods to ensure its staking services comply with regulatory requirements. The regulatory status of staking varies significantly across different jurisdictions:
1. Differences in Legal Recognition of Staking
The recognition of staking businesses varies greatly across jurisdictions:
European Union: MiCA recognizes staking services as ancillary services to custody services. Crypto asset staking service providers must obtain authorization to provide custody and management services for crypto assets on behalf of clients and bear responsibility for any crypto asset losses arising from providing staking services or from staking activities themselves.
United States: The SEC evaluates staking businesses on a case-by-case basis using the Howey Test. It focuses on whether staking involves factors such as intermediaries packaging, yield promises, and expectations of consideration, leaning towards viewing staking as an "investment contract," thus requiring relevant services to register.
Singapore: Providing staking services to the public typically falls under the DPT (Digital Payment Token) service provider framework (PSA/FSMA). Regardless of whether clients are overseas, service providers must be licensed and comply with strict AML/CFT, client asset custody, and disclosure requirements. There is no transition period; unlicensed providers must cease operations.
Hong Kong: Clearly incorporates staking businesses into the regulatory framework. Licensed virtual asset trading platforms (VATPs) are allowed to provide staking services to clients with prior approval but must comply with a comprehensive set of terms and conditions (Staking T&Cs), covering custody and control, client authorization and disclosure, risk control, and operational requirements.
These differences necessitate that cross-border staking businesses must adhere to the "strictest standard first" in their design; otherwise, they may be deemed non-compliant in certain countries.
2. Core Elements of Staking Compliance
To reduce compliance risks, staking platforms should focus on the following three aspects:
Independent Custody of Client Assets: Prevent the platform from mixing client staked assets with its own funds; ensure that client assets can be fully returned in the event of bankruptcy or liquidation.
Transparent Reward Distribution Mechanism: Disclose the methods for calculating rewards, distribution frequency, potential fluctuations in returns, and establish on-chain verifiable data records.
Risk Warnings and User Education: Clearly outline the risks that may arise during the staking process, such as network attacks, contract vulnerabilities, and policy changes, and provide retail users with risk questionnaires and educational materials.
However, due to the strict attitude of regulatory agencies towards staking services, licensed crypto asset 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 regulatory requirements of different markets.
Case Insight: Kraken's Staking Rectification
After facing enforcement from the SEC in 2023, Kraken rectified its staking business: it added user authorization processes to ensure users understand staking rules; transferred staked assets to independent trust accounts; standardized reward disclosures and provided real-time yield calculation models. In January 2025, Kraken announced the relaunch of its staking services in 37 states and 2 territories in the United States. This case illustrates that staking compliance is not merely about filing but involves restructuring business models, upgrading risk management systems, and maintaining ongoing regulatory communication.
Core Ideas for Compliance Pathways
In the face of a constantly changing global regulatory environment, crypto asset companies need to find a balance when formulating compliance pathways across different markets. The following three principles help companies find the right direction within a complex compliance system.
1. Prioritize the Strictest Jurisdictions: Starting with the U.S. and EU
Companies should first refer to the strictest regulatory standards globally, such as the regulatory requirements of the U.S. and EU. This is particularly evident in Kraken's strategy. As a globally recognized digital asset exchange, Kraken has adopted compliance measures based on EU and U.S. regulatory requirements, gradually expanding into other markets. This not only helps Kraken avoid potential legal risks 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 regulatory penalties or market bans faced by other platforms that neglect 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: Design Compliance Measures by Business Line
Modular handling of business operations is an important method for crypto asset companies to address complex regulatory requirements. For example, Kraken separates its staking, trading, and lending businesses, designing independent compliance measures for each. For instance, when providing staking services, Kraken has established interest disclosure and risk warning mechanisms that comply with EU and U.S. regulations, ensuring that clients understand the associated risks while enjoying returns.
Additionally, platforms like OKX also decompose compliance requirements for 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 Adjustments: Real-Time Updates to Compliance Manuals
Compliance management is not a one-time effort; as the global regulatory environment changes, companies need to regularly update their compliance manuals to ensure that all operations comply with the latest regulations. Kraken's practices in this regard are worth emulating, as the platform has established 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 can leave companies unprepared for regulatory changes, leading to serious legal and financial consequences.
How to Forge a Path to Compliance?
As traditional financial capital gradually flows into the crypto market, many investors are no longer satisfied with merely following market trends but are seeking more stable and secure investment methods. Especially in the context of increasing regulation, the compliance pathway becomes even more important. For companies to establish a foothold in this emerging market, they must first ensure compliance with the regulatory requirements of their respective regions and choose suitable investment management models based on these requirements.
For companies, the next key step is to find suitable service providers and partners to ensure compliance while maximizing investment returns. If your company intends to enter the crypto asset space, understanding the different regulatory frameworks and compliance requirements will help achieve sustainable development in a complex market environment.
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