The European Securities and Markets Authority (ESMA) is currently investigating Maximum Extractable Value (MEV) as a potential form of illegal market abuse under its proposed technical standards for the Markets in Crypto-Assets (MiCA) regulation.
MEV refers to the additional value that blockchain validators can obtain by manipulating the order of transactions within the blocks they create. This manipulation, known as “front-running,” allows miners to earn extra profits beyond the standard block rewards and gas fees.
Patrick Hansen, a prominent figure in the crypto regulation field, recently highlighted this issue on Twitter, emphasizing its significant implications for the crypto industry.
In a post on May 27, Hansen quoted the ESMA draft, stating that MEV, where a miner/validator can profit by reordering transactions to front-run specific transactions, clearly indicates market abuse.
Hansen pointed out that nearly all regulated crypto businesses in the EU, including exchanges and brokers, would be required to identify and report instances of MEV through comprehensive “suspicious transaction or order reports” (STORs). The ESMA STOR template itself spans six pages.
The proposed standards outline detailed procedures for detecting MEV, raising concerns about the practicality of reporting every instance. Hansen questioned the feasibility of these extensive reporting requirements, given the complexity and frequency of MEV incidents in the crypto market.
Additionally, ESMA’s draft standards propose a collaborative approach to enforcement, encouraging cooperation between authorities within and outside the EU. This means that those involved in MEV could face investigations and enforcement actions from both EU regulators and international authorities.
As part of ESMA’s ongoing efforts to refine the implementation of MiCA, the consultation package includes a wide range of technical standards aimed at enhancing market integrity and safeguarding investors. The focus on MEV demonstrates the EU’s commitment to addressing sophisticated forms of market manipulation in the rapidly changing crypto sector.
Hansen stressed the importance of stakeholder involvement in the consultation process, emphasizing that feedback from those directly involved in MEV and other crypto activities is crucial for developing effective regulatory measures.
The debate surrounding MEV and its implications has sparked a variety of opinions among industry experts.
In a post on the same day, Martin Leinweber, a digital asset strategist at MarketVector, mentioned that the discussion on MEV is multifaceted and extends beyond a simple good versus bad dichotomy.
While acknowledging negative aspects like manipulative practices, Leinweber highlighted the positive role MEV plays in certain contexts, such as facilitating necessary functions in DeFi and enabling efficient exchange arbitrage.
Leinweber further explained that MEV serves as a vital revenue stream for both chains and validators due to the competitive nature of fee markets on Layer 1 networks like Ethereum. He emphasized that as transaction fees decrease due to scalability improvements and increased competition, MEV becomes essential for maintaining network security and incentivizing validator participation.
Meanwhile, Jonathan Galea, a prominent crypto advocate and CEO of BCAS, a crypto-focused regulatory consultancy, urged caution regarding MEV practices. He clarified that while ESMA suggests MEV may indicate market abuse, it does not definitively state its existence.
Galea agreed with Hansen on the impracticality of reporting all instances of MEV and stressed the need to differentiate between various forms of MEV. He suggested that only certain forms of MEV accompanied by malicious intent should be flagged as potential market abuse indicators.
ESMA has set a deadline of June 25 for stakeholders to provide feedback on the draft standards.
Experts predict heightened scrutiny for MEV teams within the EU as enforcement approaches. If MiCA prohibits MEV practices in Europe, it could have a ripple effect on the DeFi and crypto ecosystem, potentially impacting liquidity.
ESMA’s proactive approach to regulating market abuse in the crypto sphere underscores the EU’s dedication to managing the rapidly evolving digital asset landscape. As other jurisdictions observe the implementation of MiCA, they are likely to draw insights and adjust their regulatory frameworks accordingly.