The new Markets in Crypto Assets Regulation (MiCAR) will not only impose regulatory licensing and transparency requirements on issuers, offerors and service providers in the crypto market. Rather, MiCAR will also introduce comprehensive market abuse regulation for the European crypto market in order to ensure fairness and equal opportunities for trading in crypto assets in the EU. To ensure a functioning market abuse prevention, in the future, persons who professionally broker or execute transactions in crypto assets will be obliged by Art. 92 MiCAR to implement effective precautions, systems and procedures for the prevention and detection of market abuse. In the European crypto scene, a discussion has now flared up about whether this new obligation under MiCAR could mean a de facto ban on so-called MEV activities. The abbreviation MEV stands for “Maximum Extractable Value” in the crypto sector and is particularly relevant in the area of so-called transaction ordering. Here, market participants can search for particularly lucrative transactions via the use of tools known as flashbots and transmit them directly to validators for transaction confirmation without the transaction having previously been included in the public transaction mempool accessible to all validators. For validators, the supply of MEV transactions by flashbots represents a significant competitive advantage in the hunt for block rewards.
Art. 92 MiCAR is Not a Prohibition Provision
First, it must be clarified that Art. 92 MiCAR is not a prohibition provision. Rather, the provision serves to oblige intermediaries and exporters of transactions in crypto assets to effectively assist in the prevention and detection of market abuse cases. If market participants obliged under Art. 92 MiCAR discover that there are reasonable indications of market abuse in the course of their business activities, they must report this immediately to the competent authority in their country of residence. The regulatory content of the provision is thus, in addition to the obligation to create the conditions to be able to recognize cases of abuse in their own business operations, a reporting obligation. In contrast, Art. 92 MiCAR does not prohibit the operation of a flashbot or the participation in MEV transactions or transaction ordering. Whether the provision can nevertheless be relevant for operators of flashbots will depend in each case on the specific structure of the business activity of the market participant concerned. For example, according to its wording, the obligation only affects intermediaries and exporters of transactions involving crypto assets. In this context, it is questionable whether the operation of flashbots or the transmission of a transaction to a validator for confirmation and inclusion in a block of the underlying blockchain can be an activity covered by Art. 92 MiCAR. In this respect, the wording refers to transactions on crypto assets. The activity of a flashbot operator, on the other hand, is aimed at providing an unconfirmed transaction to a validator and not at brokering a transaction over crypto assets or executing a crypto transaction itself. The direct application of Art. 92 MiCAR to flashbot operators is therefore rather unlikely, at least according to the wording of MiCAR, even though it will always depend on the specifics of the individual case.
ESMA Could Bring Clarity to MEV and Transaction Ordering under MiCAR
MiCAR requires ESMA to develop regulatory technical standards (RTS) also on the interpretation of Art. 92 MiCAR. A first draft is to be put out for public consultation in the first quarter of 2024. ESMA must submit the final version to the EU Commission by December 30, 2024. In the RTS, ESMA could also comment on the treatment of MEV as well as flashbots and transaction ordering within the scope of MiCAR’s abuse regulation for the crypto market. If MEV activities were then potentially classified as abusive activities in certain constellations, Art. 92 MiCAR could, where appropriate, require intermediaries of transactions in crypto assets and validators to implement arrangements, systems and procedures as part of their business operations to effectively detect and report market abuse activities to the competent authorities. Validator operators would thus become addressees of regulatory compliance obligations through MiCAR. In contrast, a general prohibition of transaction ordering, MEV activities or the use of flashbots cannot be derived from Art. 92 MiCAR.
Attorney at Law Lutz Auffenberg, LL.M. (London)
The lawyer responsible for advising on market abuse regulation under MiCAR in our law firm is Attorney Lutz Auffenberg, LL.M. (London).