EU’s MiCA rules could prohibit MEV activities on Ethereum

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Patrick Hansen, a Circle executive, is concerned that entities involved in Maximal Extractable Value (MEV) activities on Ethereum and other smart contract platforms might be banned from operating in the European Union (EU) once the Markets in Cryptoassets (MiCA) regulation comes into effect
MiCA, adopted by the European Parliament on April 20, 2023, marks a significant milestone as the first clear legislation governing the issuance and provision of services related to crypto-assets and stablecoins. Its enforcement is scheduled between mid-2024 and early 2025.

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Although progressive, MiCA’s Article 92, which aims to prevent and prohibit market abuse involving crypto-assets, is particularly interesting. Specifically, lawyers and industry stakeholders have drawn attention to this provision, as it holds potential implications for MEV participants operating within the EU.

Flashbots & everyone else involved in MEV should pay close attention to MiCA Art. 92 that could deem MEV to be illegal market abuse (transaction ordering).ESMA will publish technical standards on the topic in Q1 24. I highly encourage people involved to engage early-on.— Patrick Hansen (@paddi_hansen) July 29, 2023

Title VI of MiCA highlights the “prevention and prohibition of market abuse involving crypto-assets” and applies to all transactions, orders, or behaviors related to any crypto-asset traded on exchanges. Notably, this regulation covers activities regardless of whether they occur on a trading platform like Kraken, for example, or within the on-chain ecosystem like Uniswap or PancakeSwap.

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Based on this interpretation, MEV, the practice of extracting the maximum value from block production by manipulating transaction order, is now under scrutiny due to MiCA. The regulation allows agencies to examine certain MEV practices that could be construed as market manipulation, mainly if they involve artificial price inflation or deceptive transactions.
Beyond market manipulation, MiCA also addresses wash trading, another form of illegal market abuse that deliberately inflates trading volumes. Observers say this may present challenges for Crypto-Asset Service Providers (CASPs) and platforms, including exchanges approved to operate in the region, ensuring market liquidity for leading tokens while concurrently complying with the stringent MiCA requirements.

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Taking account of this broad interpretation, though enforcement is still months away, experts predict heightened scrutiny for MEV teams within the EU. If MiCA bans MEV practices in Europe, its effect might be filled across the decentralized finance (defi) and crypto ecosystem, possibly impacting liquidity.
Still, MiCA’s proactive approach to regulating market abuse in the crypto sphere underscores the EU’s commitment to managing the rapidly evolving digital asset landscape. Therefore, as the global community watches the impact of MiCA’s implementation, other jurisdictions will likely draw insights and adapt their regulatory frameworks accordingly.
In a recent Series B funding round led by Paradigm, Flashbots, a research and development startup focused on Ethereum, secured $60 million. The funding will be used to continue developing their Single Unifying Auction for Value Expression (SUAVE) network, which aims to reduce the negative impact of MEV.

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