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European Securities and Markets Authority (ESMA) said that using maximum extractable value (MEV) for Blockchain Transactions is market abuse.
The latest regulatory proposals under MiCA by the European Securities and Markets Authority (ESMA) have identified MEV, a technique used by some crypto miners to maximize profits, as a potential form of market abuse.
The MEV Practice
Maximum extractable value (MEV) is a practice where blockchain operators reorder transactions to increase profits. Some policy experts argue that this may not necessarily be a bad thing.
ESMA Express Their Concerns
The ESMA has expressed concerns over MEV involving blockchain operators previewing the network’s transaction queue to extract additional profits for themselves. This can often involve reordering user transactions and even frontrunning them with new transactions before they are written to the chain’s ledger.
MEV has been described as an “invisible tax” on users as some methods for extracting it, such as sandwich attacks and frontrunning, can reduce end-user profits. Nonetheless, some advocates within the industry believe that MEV can have a positive impact on blockchain network efficiency.
European Crypto Initiative (EUCI) Expert Shares Her Views
Anja Blaj is a policy expert at the European Crypto Initiative (EUCI). She emphasized that MEV by itself should not be deemed as a form of market abuse. She further added that it should not have a negative connotation.
She stated that some very limited scenarios and tactics have similar effects to those of market abuse. The purpose of MEV is to compensate the good actors for the validation work they do.
Some crypto policy watchers have suggested that MEV is not even within MiCA’s scope. While EUCI has warned that applying MiCA to MEV could result in overregulation.
However, the legislation extends the EU’s existing market abuse rules to include reporting suspicious activity. According to ESMA’s consultation on proposals to tackle market abuse. These activities will result from not just transactions but also the functioning of the distributed ledger technology such as the consensus mechanism.
ESMA also noted that MiCA doesn’t mandate crypto service providers to report activity such as scams or payment fraud.
Peter Kerstens Gives A Neutral Opinion On MEV
An expert on financial sector digitalization and cybersecurity, Peter Kerstens, has stated her views on MEV. She said that MEV is a neutral concept that may raise concerns about market integrity. However, she also said that it cannot be classified as good or bad.
Investors have a legitimate expectation that transactions on the blockchain will be validated in the order they were submitted. Additionally, MEV reordering can lead to frontrunning. Validators who operate blockchains can prioritize their transactions over others, allowing them to make additional profits.
Kerstens also stated that MEV may lead to questions about the integrity of the market. Furthermore, it may trigger market abuse/frontrunning, but it does not have to in every instance.
The legislation, Markets in Crypto Assets (MiCA), was finalized last year. It ended up making the EU the first major jurisdiction to regulate the burgeoning digital assets sector comprehensively.
ESMA and the European Banking Authority (EBA) have been engaged in discussions. These are regarding the measures and guidance they are obligated to provide under MiCA. Additionally, Industry watchers will be engaging with the watchdogs to improve clarity on the rules, particularly for various service providers.
EUCI is seeking more clarity from ESMA, ensuring that the regulator is clear on what scenarios involving MEV constitute market abuse.
Summary
ESMA is concerned about the practice of MEV, where blockchain operators reorder transactions to increase profits, due to its potential impact on market integrity. Peter Kerstens, an expert on financial sector digitalization and cybersecurity, believes that MEV is a neutral concept that may raise concerns.
Disclaimer
The views and opinions stated by the author or any people named in this article are for informational purposes only. They do not establish financial, investment, or other advice. Investing in or trading in stocks, cryptos, or other related indexes comes with a risk of monetary loss.
Steefan George is a crypto and blockchain enthusiast, with a remarkable grasp on market and technology. Having a graduate degree in computer science and an MBA in BFSI, he is an excellent technology writer at The Coin Republic. He is passionate about getting a billion of the human population onto Web3. His principle is to write like “explaining to a 6-year old”, so that a layman can learn the potential of, and get benefitted from this revolutionary technology.
