EU Threatens To Regulate MEV As ‘Market Abuse’

Global regulators appear divided on how to treat the shadowy practice of Maximal Extractable Value (MEV), with the latest consultation paper from the EU Securities and Markets Authority (ESMA) stating MEV could be handled as market abuse.

Published on May 25, ESMA’s third draft consultation under the European Union (EU)’s Markets in Crypto Assets (MiCA) regulations explicitly describes MEV as an example of “market abuse.”

“MEV whereby a miner/validator can take advantage of its ability to arbitrarily reorder transactions to front-run a specific transaction(s) and therefore make a profit… may suggest the existence of market abuse,” the paper said.

MEV describes techniques such as front-running or sandwich attacks used by validators and block proposers to reorder transactions and extract profits by targeting the maximal allowable slippage associated with on-chain transactions.

According to Flashbots, an MEV research organization, roughly 518,000 Ether has been extracted from the Ethereum network through MEV since Sept. 15, 2022.

Ramifications of MEV comprising market abuse

The classification of MEV as market abuse could pose significant hurdles for EU-regulated crypto firms, with the consultation indicating that EU-based crypto businesses would be required to detect and report instances of MEV as "suspicious transaction or order reports" (STORs).

“Almost all regulated crypto businesses in the EU (exchanges, brokers, etc.) would need to detect and report instances of MEV through complex [STORs],” said Patrick Hansen, the senior director of EU strategy and policy at Circle. “The ESMA STOR template alone is 6 pages long. How would this be manageable in practice if literally [every] single instance of MEV would need to be reported?”

Hansen also noted that ESMA adds global authorities could cooperate on sanctioning market abuse, warning that entities conducting MEV could become the target of regulatory investigations and enforcement actions.

The draft standards will be finalized in the coming months, with ESMA encouraging stakeholders to provide feedback to its third consultation by 25 June.

“I highly recommend anyone involved in MEV to participate in the consultation and reach out to ESMA,” Hansen urged.

However, not everyone is concerned by ESMA's draft regulations, with Davyegld, an ambassador of Soul Protocol, arguing that MEV harms ordinary blockchain users.

U.S. Department of Justice legitimizes MEV

The latest ESMA consultation comes two weeks after the U.S. Department of Justice (DoJ) appeared to legitimize the practice of MEV extraction.

A May 15 indictment charging a pair of brothers over money laundering connected to $25 million in funds obtained by targeting MEV bots with false signatures and exploiting a flaw in MEV-boost, popular MEV software, to trick the bots into giving up their payload.

The indictment described the attack as “threaten[ing] the stability and integrity of Ethereum’s blockchain” by “tampering with established protocols… which are relied upon by the vast majority of Ethereum users.”

Speaking to The Defiant, Chen Arad, the co-founder of Solidus Labs, said the DoJ drew a line between "acceptable MEV extraction strategies" and those that constitute "market abuse or fraud.”

“The DOJ seemed to exclude the more ‘common’ strategies of transaction reordering, like sandwiching, from its classification of criminal activity,” Arad told The Defiant. "The biggest takeaway for the industry should be — fraud and manipulation are always wrong and illegal, no matter the asset class or the extent of established regulation.”