MEV reporting and compliance requirements

The European Union (EU) has declared maximum extractable value (MEV) an illegal market abuse under the Markets in Crypto Assets (MiCA) Regulation.

This significant move aims to curb sophisticated market manipulation and enable all participants to engage fairly.

EU regulatory measures and definitions

MEV refers to the profit that 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 greater resources and technical knowledge. Patrick Hansen, head of strategy and policy at EU Circle, emphasized the seriousness of the problem.

“The well-known MEV, where a miner/validator reorders transactions to get ahead of specific transactions and make a profit, clearly suggests market abuse,” he explained.

The European Securities and Markets Authority (ESMA) has presented measures to tackle the MEV problem. According to ESMA, trading platforms have an obligation to monitor and report suspicious MEV activity, and the proposed standards include detailed procedures for detecting exploits.

The draft template developed by ESMA is not final and may be modified in the coming months. The regulator has set a June 25 deadline for stakeholders to submit feedback on the draft standards.

Read more: What is Maximum Extractable Value (MEV)?

MEV has been controversial in the blockchain community since 2018, inflating transaction costs, undermining network security, and promoting unfair trading. By reordering transactions, miners gain value, which leads to higher fees and inefficiencies.

Prominent faces of the cryptocurrency industry suggest various ways to solve this problem. Vitalik Buterin, co-founder of Ethereum, recently addressed the MEV issue. He designed limiting MEV through protocols that hide transaction details until they are confirmed, and separating transaction proposers from block creators to limit unfair value extraction.

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, punishable by 20 years in prison.

ESMA’s draft standards propose a collaborative approach to enforcement, calling for cooperation between authorities within and outside the EU. Once finalized, these standards will shape the cryptocurrency regulatory environment in the EU and set a precedent for other jurisdictions.