EU regulatory agency discusses MEV issue: Reordering blockchain transactions could constitute market abuse

The European Securities and Markets Authority (ESMA) recently expressed concern over Maximum Extractable Value (MEV), a practice involving operators manipulating the order of user transactions to maximize profits, which could potentially constitute market abuse under new regulatory frameworks.

MiCA Proposal Considers MEV as Potentially Suspicious Behavior

In a series of proposals under the MiCA regulation, ESMA considers MEV as potentially suspicious behavior. MEV typically involves blockchain operators, entities responsible for adding blocks to the chain, reordering transaction sequences to extract additional profits by front-running trades before transactions are permanently recorded on the blockchain ledger. This manipulation may involve front-running, where operators place their own trades ahead of those submitted by users, potentially compromising the fairness and integrity of the blockchain.

Industry Views: Intangible Taxes Contribute to Efficiency

MEV is often referred to as "intangible taxes" that may reduce users' profits through techniques like sandwich attacks and front-running trades.

According to a CoinDesk interview, while the nature of MEV is controversial, some advocates within the industry argue that MEV plays a positive role by increasing the efficiency of the blockchain network. A policy expert from the European Union Cryptocurrency Initiative (EUCI) defended MEV, stating, "MEV should not be seen as market abuse in itself, nor should it have a negative connotation." She emphasized that the primary function of MEV is to reward validators for their contributions to network maintenance, suggesting that only specific strategies similar to market abuse should be scrutinized.

Should MiCA Regulate MEV?

There is ongoing discussion about whether MEV falls within the regulatory scope of MiCA. EUCI expresses concerns that regulating MEV under MiCA may lead to excessive oversight. However, ESMA's recent consultation on market abuse includes extending existing EU rules to encompass distributed ledger technologies.

The European Commission's financial digitalization advisor noted that while MEV itself does not possess negative attributes, it raises significant questions about market integrity. ESMA's ongoing public consultation, ending on June 25th, aims to gather feedback on how MEV may result in market abuse.