tl;dr
The European Union (EU) has deemed Maximum Extractable Value (MEV) as illegal market abuse under its Markets in Crypto-Assets (MiCA) regulation. This move aims to prevent sophisticated market manipulation and ensure fair participation for all. ESMA outlined measures for trading platforms to monitor ...
The European Union (EU) has classified Maximum Extractable Value (MEV) as illegal market abuse under its Markets in Crypto-Assets (MiCA) regulation. This move aims to prevent sophisticated market manipulation and ensure fair participation for all. MEV manipulation undermines fairness, prompting EU regulatory measures which include outlined measures for trading platforms to monitor and report suspicious MEV activities. The draft standards are open for feedback until June 25.
MEV has been controversial in the blockchain community, causing inflated transaction costs and unfair trading. Prominent figures in the crypto industry, including Vitalik Buterin, have proposed solutions to reduce MEV. The US Department of Justice has taken action against MEV tactics, arresting individuals for using MEV tactics to steal $25 million from Ethereum. ESMA's draft standards seek a collaborative enforcement approach and will shape the EU's crypto regulatory environment.
MEV refers to the profit block producers can gain by reordering, including, or excluding transactions within a block. This manipulation can make the system unfair, giving an advantage to those with more resources and technical knowledge. Patrick Hansen, Circle’s EU Strategy and Policy Head, emphasized the severity of the issue, stating, "The well-known MEV, where a miner/validator reorders transactions to front-run specific transactions and make a profit, clearly suggests market abuse."
The European Securities and Markets Authority (ESMA) outlined measures to tackle MEV, requiring trading platforms to monitor and report suspicious MEV activities. The proposed standards include detailed procedures for detecting exploits. ESMA's draft template is not final and might undergo modifications in the coming months.
MEV has been contentious in the blockchain community since 2018, inflating transaction costs, undermining network security, and promoting unfair trading. By reordering transactions, miners capture value, leading to higher fees and inefficiencies. Prominent faces of the crypto industry are suggesting various ways to solve this problem. Vitalik Buterin, Ethereum’s co-founder, proposed reducing MEV through protocols that hide transaction details until confirmed and separating transaction proposers from block builders to limit unfair value extraction.
The US financial regulators are also aware of the MEV threat. The US Department of Justice (DOJ) announced the arrest of two brothers for using MEV tactics to steal $25 million from Ethereum. They face charges of fraud and money laundering, with potential 20-year prison sentences. ESMA’s draft standards propose a collaborative enforcement approach, urging cooperation between authorities within and outside the EU. Once finalized, these standards will shape the EU’s crypto regulatory environment and set a precedent for other jurisdictions.