Crypto News– The European Union’s market regulator has raised concerns over the practice of maximum extractable value (MEV), where blockchain operators manipulate user transactions to maximize their own profits.
EU Regulatory Body Suggests Rearranging Blockchain Transactions Could Constitute Market Abuse
This stance, outlined in regulatory proposals by the European Securities and Markets Authority (ESMA) under the digital assets law known as MiCA, has sparked debate within the industry. MEV, broadly defined, refers to trading strategies employed by blockchain operators to gain extra profits by rearranging the transaction queue or frontrunning transactions just before they are added to the blockchain ledger.
MEV is frequently referred to as an invisible tax on users due to its impact on end-user profits, with tactics like sandwich attacks and frontrunning directly diminishing profits. Despite being a contentious topic, some industry proponents argue that MEV can have a positive effect overall by enhancing blockchain network efficiency.
Beyond the Scope?
Some observers of crypto policy have contended that MEV falls outside the scope of MiCA, and the European Union Cryptocurrency Institute (EUCI) has cautioned that applying MiCA to MEV could result in excessive regulation. While it is accurate that the MiCA text does not explicitly address MEV, ESMA’s consultation on proposals to address market abuse acknowledges that the legislation broadens the EU’s existing market abuse regulations to encompass reporting suspicious activities arising not only from transactions but also from ‘the functioning of distributed ledger technology such as the consensus mechanism.’
ESMA also highlighted that MiCA does not mandate crypto service providers to report activities such as scams, payment fraud, or account takeovers. Peter Kerstens, an advisor to the European Commission on financial sector digitalization and cybersecurity, expressed that MEV is neither inherently positive nor negative but may raise concerns regarding market integrity. Investors expect that blockchain transactions will be validated in the sequence they were submitted, and MEV reordering can result in frontrunning. This means that validators operating blockchains may prioritize their own transactions ahead of others to gain additional profits, as outlined by Kerstens.
Seeking clear regulatory guidance
The legislation, known as Markets in Crypto Assets (MiCA), was completed last year, making the EU the first major jurisdiction to regulate the rapidly growing digital assets sector comprehensively. ESMA and the European Banking Authority (EBA) have been seeking feedback and consulting on the measures and guidance mandated under MiCA. Industry experts are actively engaging with these regulatory bodies to enhance clarity on the rules, especially for different service providers
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