Venture capital firm Paradigm has filed a comment letter in response to the European Securities and Markets Authority (ESMA) consultation paper on enforcing abuse prevention in the crypto assets market.
ESMA’s paper concerns the implementation of measures introduced in the Markets in Crypto-Assets (MiCA) Act, the first of which comes into force on June 30. Paradigm’s main point of contention, as with earlier commenters, was ESMA’s stance on “market abuse, e.g., the well-known Maximum Extractable Value (MEV).”
ESMA needs a clearer understanding of MEV
ESMA is incorrectly “drawing a parallel between market abuse of the kind seen in traditional, centralized financial markets and activities of base layer actors,” Paradigm said, adding:
“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.”
ESMA needs a better understanding of MEV, and furthermore, regulating base-layer blockchain microstructure is inherently wrong, Paradigm argued. With such regulation, “we likely would not have seen the development of a number of out-of-protocol tools that redistribute the proceeds of MEV back to users—balancing protocol efficiency and security with user welfare maximization.”
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Nuance in place of a solution
Paradigm is seemingly referring to rollups and flash bots. A paper touching on their use to counteract the potential misuse of MEV was posted on Paradigm’s website in 2021. Its conclusions were not reassuring, however. “Hopefully, the next year will bring more clarity on MEV and Ethereum’s path forward,” it said.
Fair and equitable use of MEV remains a goal for the future, as the steady stream of “sandwich” attacks shows.
The enforcement of the MiCA article on the requirements for persons professionally arranging or executing transactions should be applied with “nuance.” Existing regulation cannot be applied to a system with fundamentally different organization and architecture, Paradigm said in its letter.
“ESMA should encourage industry to build products that enhance consumer welfare in aggregate without taking an opinionated view on how those products are designed,” Paradigm concluded. It did not suggest a solution to the misuse of MEV.
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