The European Securities and Markets Authority (ESMA) has raised concerns about a practice known as reordering blockchain transactions, referring to it as a potential form of market abuse in its regulatory proposals. This technique, also referred to as Maximum Extractable Value (MEV), involves blockchain operators rearranging user transactions to maximize their own profits. However, some industry watchers argue that MEV is not necessarily a bad practice and that it can actually improve blockchain network efficiency. They believe that MEV should not be considered market abuse and should not carry a negative connotation.
Critics of ESMA’s stance argue that MEV is not even within the scope of the regulatory framework under MiCA (Markets in Crypto Assets). They warn that applying MiCA to MEV could result in overregulation. While the MiCA text does not explicitly mention MEV, ESMA’s consultation on market abuse proposes extending the legislation to include suspicious activity resulting from the functioning of distributed ledger technology.
Peter Kerstens, an adviser to the European Commission, stated that MEV is neither inherently good nor bad but may raise questions about market integrity. Investors expect transactions on the blockchain to be validated in the order they were submitted, and reordering transactions can lead to frontrunning and potentially market abuse. Kerstens emphasized that MEV does not always result in market abuse but may trigger concerns about the integrity of the market.
As ESMA and the European Banking Authority continue to consult on regulatory measures under MiCA, industry participants are seeking greater clarity on the rules, particularly regarding MEV. The European Crypto Initiative (EUCI) is advocating for ESMA to specify which scenarios involving MEV constitute market abuse. They argue that effective enforcement requires clarity on who is responsible for malicious MEV tactics. ESMA’s consultation is open for public feedback until June 25, and there may be an official institutional view on the matter in the near future.