Paradigm has raised concerns about the European Securities and Markets Authority’s (ESMA) proposed regulations under the Markets in Crypto Assets Regulation (MiCA), particularly regarding their interpretation of Maximum Extractable Value (MEV) and the scope of regulatory measures.

In a detailed critique of ESMA’s third consultation package, Paradigm highlighted potential adverse effects on EU citizens and the broader crypto ecosystem resulting from some of the proposed rules.

Regarding MEV, ESMA categorizes it as a form of market abuse under MiCA. However, Paradigm argues that ESMA’s approach misunderstands MEV’s mechanics and implications, emphasizing its crucial role in the efficiency and security of decentralized networks, particularly in facilitating the allocation of blockspace and supporting essential market activities in the DeFi ecosystem.

Paradigm stated:

“ESMA’s characterization of MEV as market abuse akin to traditional front-running demonstrates a fundamental misunderstanding of blockchain technology.”

The firm clarified that blockchain transactions are inherently public and transparent, unlike traditional front-running, which involves insider information and unfair advantages.

Paradigm also expressed concerns about the potential overreach of applying Market Abuse Regulations (MAR) to the base layer of crypto assets, which involves decentralized infrastructure operators. They argued that MAR, designed for centralized financial markets, would be impractical and could inadvertently encompass entities such as Internet Service Providers and cloud data centers.

Paradigm urged ESMA to engage more deeply with the private sector to better grasp MEV’s nuanced role in blockchain ecosystems. They cautioned that misapplying MAR to blockchain operations could hinder innovation and lead to the relocation of technology firms outside the EU.

Proposing a more targeted approach, Paradigm suggested limiting MAR’s application to centralized Crypto Asset Service Providers (CASPs) that operate exchanges, emphasizing the importance of fair market practices and transparency in these platforms.

Paradigm’s response underscores the complexities of regulating emerging technologies with frameworks originally designed for traditional markets. As ESMA continues its consultation, the crypto industry remains vigilant about potential regulatory impacts that could shape the future landscape of blockchain and digital assets in Europe.