Paradigm has raised the alarm over the European Securities and Markets Authority’s (ESMA) proposed regulations under the Markets in Crypto Assets Regulation (MiCA), focusing on the misinterpretation of the maximum extractable value (MEV) and the possible exceedance of regulatory measures.
In a detailed response to ESMA’s third consultation package, the company outlined the potential negative consequences for both EU citizens and the wider crypto ecosystem that may inadvertently arise from some of the proposed rules.
MEV concerns
ESMA recently said that MEV will be considered a “clear form of market abuse” under the upcoming MiCA framework. However, Paradigm raised concerns that the regulator’s current approach misinterprets the operation and implications of MEV, a key feature in the operation of DeFi ecosystems.
MEV refers to the potential value that miners and validators can gain from reordering transactions within a block, which Paradigm believes is essential for the efficiency and security of decentralized networks.
Paradigm said MEV plays an “important role” in supporting the DeFi ecosystem by enabling the efficient allocation of block space and aiding in essential market activities. According to the company:
“ESMA’s characterization of MEV as a form of market abuse, akin to front-running in traditional financial markets, demonstrates a fundamental misunderstanding of blockchain technology.”
The company added that traditional front-running involves someone using inside information to execute trades before others, thus gaining an unfair advantage. Paradigm pointed out that this definition does not apply to blockchain transactions, which are typically public and transparent by design.
Paradigm said that since all participants can see pending transactions on blockchains, there is no prior knowledge involved, making the traditional concept of front-running inapplicable in this context.
Exceeding regulations
Paradigm’s feedback also addressed broader concerns about ESMA’s intention to apply market abuse regulations (MAR) to the “base layer” of crypto assets. This layer involves decentralized infrastructure managers that record and validate blockchain transactions.
Paradigm argues that MAR, designed for traditional financial markets, is not suitable for this decentralized infrastructure. According to the company:
“Applying MAR to the base layer of crypto would represent a significant departure from traditional financial markets regulations. This could inadvertently include internet service providers, cloud data centers and network software developers under its scope, which is impracticable and inconsistent with ESMA’s mandate.”
The company urged ESMA to conduct further research and work with the private sector to better understand the nuanced role of MEV in blockchain ecosystems. It warned that misapplying MAR to blockchain operations could stifle innovation and force key tech companies to relocate outside the EU.
Paradigm proposed that the applicability of MAR should be limited to situations involving centralized services and platforms operated by Crypto Asset Service Providers (CASPs) with direct customer relationships.
The company said:
“CASPs operating centralized exchanges must ensure fair market practices and transparency.”
Paradigm’s response highlights the complexity of regulating emerging technologies with frameworks designed for traditional markets. As ESMA continues its consultation process, the crypto industry remains vigilant for potential regulatory developments that could shape the future of blockchain and digital assets in Europe.