Circle executive Patrick Hansen is concerned that firms engaged in Maximal Extractable Value (MEV) activities on Ethereum and other smart contract platforms may be barred from functioning in the European Union (EU) once the Markets in Cryptoassets (MiCA) law takes effect.
MiCA, which was passed by the European Parliament on April 20, 2023, is a significant step forward because it is the first clear regulation controlling the issue and distribution of services connected to crypto-assets and stablecoins. It will go into effect between mid-2024 and early 2025.
MiCA’s Article 92, which tries to prevent and punish market manipulation using crypto-assets, is particularly intriguing. Lawyers and industry stakeholders, in particular, have raised attention to this provision, which has possible ramifications for MEV participants operating within the EU.
Flashbots and anybody else interested in MEV should be aware of MiCA Art. 92, which could classify MEV as illegal market abuse (transaction ordering).
Title VI of the MiCA focuses on the “prevention and prohibition of market abuse involving crypto-assets” and applies to all transactions, orders, or behaviors affecting any crypto-asset traded on exchanges. Notably, this legislation applies to all actions, whether they take place on a trading platform like Kraken or within the on-chain ecosystem like Uniswap or PancakeSwap.
According to this understanding, MiCA has put MEV, the practice of extracting the most value from block production by altering transaction order, under examination. The rule empowers agencies to investigate certain MEV practices that may be considered as market manipulation, particularly if they involve artificial price inflation or deceptive transactions.
MiCA also targets wash trading, another sort of illicit market abuse that artificially inflates trade volumes. According to observers, this may provide difficulties for Crypto-Asset Service Providers (CASPs) and platforms, including exchanges allowed to operate in the region, in providing market liquidity for major coins while also complying with the onerous MiCA rules.
Taking this broad interpretation into consideration, analysts foresee more scrutiny for MEV teams in the EU, even though enforcement is still months away. If MiCA prohibits MEV practices in Europe, the effects may be felt across the decentralized finance (defi) and crypto ecosystems, potentially affecting liquidity.
Nonetheless, MiCA’s proactive effort to regulate crypto market abuse demonstrates the EU’s commitment to managing the quickly expanding digital asset sector. As a result, as the global community monitors the impact of MiCA’s adoption, other jurisdictions are likely to draw lessons and change their regulatory regimes accordingly.
Flashbots, an Ethereum-focused research and development business, received $60 million in a recent Series B fundraising round led by Paradigm. The money will be used to expand their Single Unifying Auction for Value Expression (SUAVE) network, which tries to mitigate the negative effects of MEV.