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Venture capital firm Paradigm has submitted a comment letter in response to the European Securities and Markets Authority (ESMA) consultation paper on preventing abuse in the crypto assets market.
ESMA’s paper addresses the implementation of measures introduced in the Markets in Crypto-Assets (MiCA) Act, with the first measures coming into effect on June 30. Paradigm’s primary concern, shared by other commenters, is ESMA’s position on “market abuse, e.g., the well-known Maximum Extractable Value (MEV).”
ESMA Needs a Clearer Understanding of MEV
Paradigm argues that ESMA is incorrectly equating market abuse in traditional, centralized financial markets with activities of base layer actors in the crypto space. Paradigm states:
“At present, there is no universally-accepted way to identify which MEV-related activities are harmful or suspicious, so requiring the ecosystem to monitor and prevent inherently subjective behavior is a recipe for inconsistent application and unintended consequences.”
Paradigm insists that ESMA needs a better understanding of MEV and that regulating base-layer blockchain microstructure is inherently flawed. They argue that such regulation could stifle innovation, including the development of tools that redistribute MEV proceeds back to users, balancing protocol efficiency and security with user welfare.
Nuance in Place of a One-Size-Fits-All Solution
Paradigm refers to rollups and flash bots as tools that counteract potential MEV misuse, noting a 2021 paper posted on their website discussing these tools. However, the paper concludes with uncertainty about the future clarity on MEV and Ethereum’s path forward.
Fair and equitable use of MEV remains a future goal, as evidenced by ongoing “sandwich” attacks. Paradigm emphasizes that the enforcement of the MiCA article on transaction arrangement should be applied with “nuance.” Existing regulations cannot be directly applied to a fundamentally different system and architecture.
Paradigm concludes their letter by urging ESMA to encourage industry innovation aimed at enhancing consumer welfare without dictating the design of such products. They did not propose a specific solution to the misuse of MEV.
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