ESMA targets MEV as potential market abuse in MiCA proposal

The European Securities and Markets Authority (ESMA) is examining maximum extractable value (MEV) as a potential form of illegal market abuse as part of its proposed technical standards for crypto-asset markets. (MiCA) regulation.

MEV refers to the additional value that blockchain validators can gain by manipulating the order of transactions within the blocks they create. This manipulation, often referred to as “front-running,” allows miners to make additional profits beyond standard block rewards and gas fees.

Patrick Hansen, a well-known commentator on crypto regulation, recently brought attention to this issue on Twitter, highlighting its significant implications for the crypto industry.

In a May 27 specific (s) and therefore make profits” clearly indicates market abuse.

Hansen noted that almost all regulated crypto businesses in the EU, including exchanges and brokers, would be required to detect and report cases of MEV through “suspicious transaction or order reports” (STOR). ) complete. The ESMA STOR model alone spans six pages.

The proposed standards impose detailed procedures for VTE detection, raising concerns about the feasibility of reporting every case. Hansen questioned the practicality of these expanded reporting requirementsgiven the complexity and frequency of MEV occurrences in the crypto market.

Furthermore, ESMA’s draft standards suggest a collaborative approach to enforcement, calling for cooperation between authorities within and outside the EU. This means that actors involved in the MEV could be subject to investigations and enforcement measures not only from European regulators, but also from international authorities.

The consultation programme, part of ESMA’s ongoing efforts to refine the implementation of MiCA, includes a wide range of technical standards aimed at strengthening market integrity and protecting investors. The focus on MEV underlines the EU’s commitment to combatting sophisticated forms of market manipulation in the rapidly evolving crypto sector.

Hansen emphasized the importance of stakeholder participation in the consultation process, noting that feedback from those directly involved in MEV and other crypto activities is crucial for developing effective regulatory measures.

The debate around MEV and its implications has generated varying opinions among industry experts.

In an X post of the same day, Martin Leinweber, digital asset strategist at MarketVector, said“I believe the discussion around MEV is multifaceted and extends beyond a simple dichotomy between ‘good’ and ‘bad’.

“While there are indeed negative aspects, such as manipulative practices, it is essential to recognize the positive role that EVM plays in certain contexts. For example, in DeFi, MEV can facilitate necessary functions such as liquidations on lending protocols and enable efficient FX arbitrage,” Leinweber added.

Leinweber further explained that MEV serves as a crucial revenue source for chains and validators due to the competitive nature of fee markets on layer 1 networks like Ethereum. He highlighted that as transaction fees trend downward due to improvements in scalability and increased competition, MEV becomes essential to maintaining network security and encouraging validator participation.

Meanwhile, Jonathan Galea, a prominent crypto advocate and CEO of BCAS, a crypto-focused regulatory consultancy, urged caution. He clarified“ESMA is clear in its document, stating that the MEV can be indicative of market abuse, then specifically referring to front-running. It does not specify that this “clearly suggests the existence of market abuse”.

Galea agreed with Hansen that it is not practical to report all cases of VTE, emphasizing the need to distinguish between different forms of VTE. He noted that front-running can be considered an indicator of market abuse, suggesting that only certain forms of EVM likely accompanied by malicious intent should be flagged as potential indicators of market abuse.

The crypto lawyer also echoed the importance of industry feedback to ESMA, and not just from those directly involved in MEV.

ESMA has set June 25 as the deadline for stakeholders to submit their comments on the draft standards.

Given this broad interpretation, even though enforcement of the law is still about a month away, experts predict increased monitoring of MEV teams within the EU. If MiCA bans MEV practices in Europe, its effects could ripple through the decentralized finance (DeFi) and crypto ecosystem, which could impact liquidity.

ESMA’s proactive approach to regulating market abuse in crypto underlines the EU’s commitment to managing the rapidly evolving digital asset landscape. As the global community watches the implementation of MiCA, other jurisdictions will likely learn from it and adapt their regulatory frameworks accordingly.

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