Introduction
Since December 2024, cryptoassets and related services are regulated in the European Union by the Markets in Crypto-Assets Regulation (MiCA). Although the regulation provides a comprehensive set of rules for issuers of cryptoassets and the provision of cryptoasset services, some questions remain about the practical application of the rules.
Most recently, the European Securities and Markets Authority (ESMA) addressed the regulatory requirements for copy trading services in relation to cryptoassets (also referred to as auto trading services).1
Notably, in order to comply with MiCA, firms that provide copy trading services in relation to cryptoassets will need to consult ESMA’s Q&A and supervisory briefing on auto trading services under MiFID II2 to determine the appropriate classification and regulatory requirements for the provision of these services under MiCA.
Definition of Copy Trading
Copy trading is a service that allows a client’s assets to be traded based on the trading activities of another trader, known as the “copied trader” or “signal provider.” This service introduces a social element to trading, as clients essentially replicate the strategies and trades of the signal provider. Typically, the trading process is automated, ensuring that the client’s trades mirror those of the signal provider in real time. However, there can also be instances where the trading is partially manual, allowing for or even requiring some degree of client intervention in the trading of its assets.3
Classification of Copy Trading Services in the Context of MiCA
Copy trading services are not a new development in connection with the rise of cryptoassets, and have been offered in the past in relation to financial instruments. Therefore, ESMA evaluated the regulatory classification of auto trading services in the past. Based on these considerations, ESMA published the following guidance concerning auto trading services in relation to financial instruments:
MiFID Questions and Answers – Investor Protection and Intermediaries – Automatic execution of trade signals (June 2012).
Supervisory Briefing on Supervisory Expectations in Relation to Firms Offering Copy Trading Services (March 2023).
Due to the similarity in definitions and scope between (i) the investment services of “investment advice” and “portfolio management” under MiFID II4 and (ii) the cryptoasset services of “providing advice on crypto-assets” and “providing portfolio management of crypto-assets” under MiCA, ESMA has determined that the guidance provided under MiFID II applies equally to copy trading services of cryptoassets under MiCA.5
Therefore, a case-by-case assessment will be necessary to determine whether the copy trading service offered by the cryptoasset service provider falls within the scope of MiCA and what type of cryptoasset services are triggered when providing auto trading services. However, services that provide the service provider with investment discretion by automatically executing the trade signals of third parties will regularly qualify as portfolio management;6 and services that require client action prior to the execution of a transaction may qualify as investment advice or investment brokerage depending on the interaction with the client.7
Current UK Approach to Copy Trading Services
In the UK, the Financial Conduct Authority (FCA) also applies ESMA’s “MiFID Questions and Answers – Investor Protection and Intermediaries – Automatic execution of trade signals in June 2012”8 guidance to copy trading services, which qualifies copy trading as portfolio or investment management in cases where the service provider has investment discretion by automatically executing the trade signals of third parties. Currently, only copy trading services in relation to financial instruments require an authorization in the UK. Whether the FCA will extend its approach to the categorisation of copy trading services to cryptoassets remains to be seen, but we would expect this to be the case.
Summary
While MiCA does not explicitly define copy trading services, the existing guidance under MiFID II provides a robust framework to determine the appropriate classification and regulatory requirements for the provision of these services. Compliance with MiCA can be ensured by leveraging the insights from ESMA’s Q&A and supervisory briefing in relation to firms offering auto trading services. As the regulatory environment, particularly in relation to cryptoasset services, continues to evolve in the EU and the UK, staying informed will be essential for navigating the complexities of the cryptoasset market.
For further information, please contact:
Sebastian J. Barling, Partner, Skadden
sebastian.barling@skadden.com
_______________
2 Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (recast) (MiFID II).
3 ESMA Supervisory Briefing on Supervisory Expectations in Relation to Firms Offering Copy Trading Services (30 March 2023).
4 Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (recast).
6 ESMA, MiFID Questions and Answers: Investor Protection & Intermediaries (22 June 2012).
7 Id.
8 Id.
This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws.
