Does the MiCA prohibit transaction ordering?

This post first appeared as blog post at FIN LAW.

The new Markets in Crypto Assets Regulation (MiCA) In the future, not only issuers, providers and service providers in the crypto market will be subject to supervisory licensing requirements and transparency requirements. Rather, the MiCA will also introduce comprehensive market abuse regulations for the European crypto market in order to ensure fairness and equal opportunities when trading crypto assets in the EU. In order to ensure a functioning prevention of market abuse, persons who professionally broker or carry out transactions with crypto assets will be obliged to implement effective precautions, systems and procedures for the prevention and detection of market abuse via Art. 92 MiCA.

In this context, a discussion has now broken out in the European crypto scene as to whether this new obligation under the MiCA could mean a de facto ban on so-called MEV activities. In the crypto sector, the abbreviation MEV stands for the “Maximum Extractable Value” and is particularly relevant in the area of ​​so-called transaction ordering. Here, market participants can use tools known as flashbots to search for particularly lucrative transactions and transmit them directly to validators for transaction confirmation without the transaction first being included in the public transaction mempool accessible to all validators. For validators, the provision of MEV transactions by flashbots means a significant competitive advantage in the hunt for block rewards.

Art. 92 MiCA is not a prohibition provision

First of all, it must be made clear that Art. 92 MiCA is not a prohibition provision. Rather, the provision serves to oblige intermediaries and executors of transactions involving crypto assets to effectively assist in the prevention and detection of cases of market abuse. If market participants who are obliged under Art. 92 MiCA determine 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 domicile.

The regulatory content of the provision is therefore, in addition to the obligation to create the conditions to be able to identify cases of abuse in one’s own business operations, a reporting obligation. In contrast, Art. 92 MiCA does not prohibit the operation of a flashbot or participation in MEV transactions or transaction ordering. Whether the regulation can still be relevant for operators of flashbots will depend on the specific structure of the business activity of the market participant concerned. According to its wording, the obligation only applies to intermediaries and executors of transactions involving crypto assets.

In this context, it is questionable whether the operation of flashbots or the transmission of a transaction made possible by them to a validator for confirmation and inclusion in a block of the underlying blockchain can be an activity covered by Art. 92 MiCA. In this respect, the wording refers to transactions involving 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 arranging a transaction for crypto assets or executing a crypto transaction itself MiCA is therefore rather remote, even if it will always depend on the special features of the individual case.

ESMA could bring clarity to MEV and transaction ordering under MiCA

The MiCA obliges the ESMA to develop regulatory technical standards (RTS) and to interpret Art. 92 MiCA. A first draft is to be made available 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 MEVs as well as flashbots and transaction ordering in the scope of MiCA’s abuse regulation for the crypto market. If MEV activities were then potentially classified as abusive activities in certain constellations, Art.

92 MiCA may require crypto asset brokers and validators to implement arrangements, systems and procedures within their business operations to effectively detect and report market abuse activity to the relevant authorities. The operators of validators would thus become addressees of regulatory compliance obligations through MiCA. In contrast, Art. 92 MiCA does not result in a blanket ban on transaction ordering, MEV activities or the use of flashbots.