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

Compliance Insights in the MiCA Era As traditional financial capital continuously flows into the crypto market, more and more investors are beginning to seek stable and reliable crypto asset investment management services. Especially those who are already tired of monitoring market trends daily and trying various new strategies are eager to plan their crypto asset portfolios 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 includes innovative businesses such as portfolio management, copy trading, and staking into its regulatory system for the first time. Under the MiCA framework, several crypto asset service providers have obtained regulatory licenses to provide services such as portfolio management to clients. So far, there are 10 licensed institutions in the European Union that help clients manage crypto asset portfolios, including large platforms like eToro and Kraken. eToro offers users 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 investment. Kraken, on the other hand, has expanded its staking services based on crypto asset trading and is exploring a compliant cross-border asset management model. 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 firms: in the future, all service providers involved in portfolio management, staking, or copy trading must respond positively to regulatory challenges. For crypto asset platforms, fund managers, and even individual investors, this means two practical 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 business global 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 not suitable for the client, the service provider must not offer portfolio management or related advice. At the same time, when providing investment advice, the 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 objectives; when providing portfolio management, the 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 enhances 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 technical 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. The platform provides transparent trading signals and historical performance, enabling users to select and replicate the strategies of professional traders. Its core feature is the direct connection between investors and experienced traders, allowing investors to 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 experience of others. Algorithmic Trading is a method that utilizes mathematical models and statistical methods for data analysis, and executes trading decisions automatically through algorithms. In the cryptocurrency market, algorithmic trading often combines big data, machine learning, and artificial intelligence technologies to achieve high-frequency and automated investment operations. Compared to manual trading, algorithmic trading executes trades faster and with greater discipline, allowing for swift and “counterintuitive to human nature” objective responses in a rapidly changing market environment, thus reducing the biases of human judgment. As a result, it has gradually become an important product type offered to investors by MiCA-licensed CASPs. It is worth noting that MiCA does not explicitly require the underlying asset types for portfolio management to be crypto asset spot or derivatives. While 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 made by MiCA regulatory requirements regarding the use of derivatives (such as futures, options, etc.) as the underlying assets. When the underlying assets involve crypto derivatives, there may be a competition and cooperation issue between crypto regulation (such as MiCA) and traditional financial regulation (such as MiFID). MiCA stipulates the compliance requirements for Portfolio Management and references the standards of MiFID in certain aspects, particularly in terms of suitability assessments and investor protection. However, the regulatory scope of MiFID is not explicitly limited to fiat derivatives; some crypto derivatives may also fit the definition of financial instruments under MiFID, thus requiring compliance with both MiCA and MiFID requirements. This dual regulation may pose compliance challenges, especially where there may be overlaps or differences in product compliance assessments, capital requirements, and derivative trading rules. Although there are differences in the ways both achieve their investment goals, they face challenges and opportunities in terms of compliance. The following will explore the regulatory requirements for copy trading and quantitative strategies using two representative jurisdictions with strict compliance.
3. EU (MiCA) In the EU, MiCA presents detailed requirements for CASPs as a unified regulatory framework, with a particular emphasis 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 of crypto assets; portfolio management can only begin if the client is deemed “suitable.” If the client does not provide information or the assessment is not suitable, portfolio management must not be initiated. It is also required to conduct a reevaluation of the client at least every two years. Regular reporting obligation: A portfolio management report must be issued to the client at least quarterly (in electronic form; if the client has an “online system” and has access records for the current quarter, it can be fulfilled according to the “online continuous availability + reminder” mechanism), and the content must “fairly and balanced” review portfolio activities and performance and update suitability information. Cost and fee transparency disclosure obligation: An assessment of the “cost and complexity of equivalent products” must be conducted within the suitability framework, and all involved fees and third-party interests must be clearly disclosed. Market fairness: MiCA requires that platforms must not manipulate market prices using algorithms or replication mechanisms and must maintain fairness and transparency.
4. 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/mirror trading or model-driven strategies, which provide clients with advice on securities or discretionary management, generally fall under the category of investment advisers as defined by 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, and whether it triggers CTA/CTP/FCM status depends on specific business activities. Risk and suitability disclosures: The SEC emphasizes sufficient and non-misleading disclosures for “algorithmic/robotic investment advisers” (model assumptions, data and limitations, backtesting and performance presentation, risks deviating from client goals, etc.) and the fulfillment of fiduciary duties, which are key focus areas during inspections. Anti-market manipulation: Both the SEC and CFTC prohibit the use of copy or algorithmic trading to manipulate the market or engage in insider trading. The CFTC prohibits manipulation and fraudulent devices under CEA §6©(1) and 17 CFR 180.1/180.2; the SEC, on the other hand, proposes anti-manipulation/anti-insider frameworks 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 offered by mainstream cryptocurrency platforms as an important component of the blockchain network validation mechanism. 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 asset service platforms such as Kraken, Binance, and Coinbase offer staking services, allowing users to put their crypto assets into the network to earn staking rewards. Staking has significant financial characteristics, and thus has become an important focus of compliance construction in various jurisdictions. For example, after Kraken was ordered by the U.S. SEC to stop its staking services in 2023, it made large-scale adjustments to 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:
5. Differences in the Legal Recognition of Staking The recognition of staking business varies greatly across different judicial jurisdictions: EU: MiCA recognizes staking services as ancillary services to custody services. Providers of cryptocurrency staking services must be authorized to provide custody and management services for cryptocurrency assets on behalf of clients and are responsible for any losses of cryptocurrency assets resulting from providing staking services to clients or from the staking activities themselves. USA: The SEC conducts case-by-case assessments of staking operations using the Howey Test as a standard. It focuses on whether staking operations involve factors such as intermediary bundling, profit promises, and expectations of consideration, tending to view staking as an “investment contract,” thus requiring registration of the relevant services. Singapore: Providing staking services to the public generally 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, and unlicensed entities must cease operations. Hong Kong: Staking operations are explicitly included in 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 complete set of terms and conditions (Staking T&Cs) covering custody and control, client authorization and disclosure, risk control, and operational requirements. This difference necessitates that cross-border staking operations adhere to the “strictest standards first” in design, otherwise they may be deemed non-compliant in certain countries.
6. The core elements of staking compliance To reduce compliance risks, the staking platform should focus on the following three aspects: Independent Custody of Customer Assets: Prevent the platform from mixing customer pledged assets with its own funds; ensure that customer assets can be fully returned in the event of bankruptcy or liquidation. Transparent Reward Distribution Mechanism: Disclose the reward calculation method, distribution frequency, potential fluctuations in earnings, and establish on-chain verifiable data records. Risk Alerts 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, it is precisely because of the regulatory authorities' strict attitude 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 the staking rules; it transferred staking assets to an independent trust account; and it 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 is not just about record-keeping, but involves restructuring business frameworks, upgrading risk management systems, and maintaining ongoing regulatory communication. The core idea of the compliance path In the face of the ever-changing global regulatory environment, crypto asset companies need to find a balance between different markets when formulating their compliance paths. The following three key principles help companies find the right direction within the complex compliance system.
7. Strictest judicial jurisdictions 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 implemented 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 associated with “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 faced by other platforms due to neglecting regulatory requirements (such as Binance). This strategy enables Kraken to operate smoothly in multiple jurisdictions and gradually expand its global market share.
8. Modular Compliance Architecture: Designing Compliance Measures by Business Modular processing of business operations for cryptocurrency asset companies is an important method to cope with complex regulatory requirements. For example, Kraken splits its operations such as staking, trading, and lending, designing independent compliance measures for each business. For instance, when providing staking services, Kraken has set up interest rate disclosure and risk warning mechanisms that comply with EU and US regulations, ensuring that customers understand the relevant risks while enjoying returns. In addition, platforms like OKX also break down the compliance requirements of various business lines in a similar way, 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.
9. 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 that all operations comply with the latest regulations. Kraken's practices in this regard are worth learning from; 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, leading to 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 beginning to seek more stable and secure investment methods rather than just following market trends. Especially against the backdrop 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 respective regions and choose suitable investment management models based on these requirements. For enterprises, the next key step is to find suitable service providers and partners, ensuring compliance while maximizing investment returns. If your enterprise intends to enter the cryptocurrency asset field, understanding different regulatory frameworks and compliance requirements will help achieve sustainable development in a complex market environment.

Original authors: Huang Wenjing, Li Chenrui