Notes from the Crypto Law Seminar #3 on the paper “Crypto-Asset Market Abuse Under EU MiCA”.
The scope of application of Title VI of MiCA (Markets in Crypto-Assets Regulation) which contains its anti-market abuse rules.
- It extends beyond the scope of other titles, applying to acts carried out by any person concerning crypto assets admitted to trading or for which a request for trading has been made.
- There is uncertainty about whether Title VI applies to crypto assets traded on automated market makers (AMMs), but not traded MiCA-regulated trading platforms.
- Despite the exclusion of non-fungible tokens (NFTs) from MiCA, most NFTs as currently known will likely still fall within the scope of MiCA and Title VI.
The three main acts of market abuse defined under Title VI are insider dealing, unlawful disclosure of insider information, and market manipulation.
- Regarding market manipulation specifically, malicious intent appears to be an important factor in determining whether an act constitutes market manipulation under Article 91 of MiCA. This is based on the wording used in the article, which includes phrases like “unless carried out for legitimate reasons” and refers to employing “a fictitious device or any other form of deception or contrivance” or “disseminating information which is likely to give false or misleading signals”.
- However, participants in the seminar discussed the challenges in clearly distinguishing legitimate trading practices from manipulative ones in the crypto asset markets. The profit motive alone cannot be used to distinguish manipulation, as most trading is done with the intent to make money. More nuance is needed.
There was significant debate among the seminar participants about whether and to what extent MEV activities fall within the scope of market abuse as defined under Title VI of the Markets in Crypto-Assets Regulation (MiCA).
- A key point of discussion was distinguishing between “good” and “bad” forms of MEV:
- Good MEV was described as MEV that promotes healthy market functioning and efficiency. Examples included MEV that enables arbitrage between decentralized exchanges (leading to price convergence), MEV that enables liquidations to happen quickly to protect lenders, and MEV that generally reduces gas costs. The argument is that without good MEV, DeFi markets would be less efficient.
- Bad MEV was described as MEV that is extractive and harms other market participants. Clear examples of bad MEV that could constitute market manipulation include:
- Sandwich attacks, where a MEV bot or searcher places orders before and after a victim’s trade to extract value. There was debate on whether sandwiching with public mempool info is inherently manipulative.
- Time-bandit attacks that involve a malicious MEV bot reorging blocks for their own gain. This harms the integrity of the blockchain.
- Usage of inside information obtained from “dark pools” or private mempools to trade in an advantaged way. This raises issues of fairness.
- However, participants noted the difficulty with clearly defining and identifying all forms of bad MEV that cross the line into market abuse. Regulators may be tempted to take an overly broad view that most MEV is manipulative.
- There was a general view that more clarity and nuance is needed from regulators on precisely what specific MEV activities would be considered market abuse, rather than a blanket categorization. Relevant factors could include the intent behind the MEV, the information advantages employed, and the effects on market efficiency and integrity.
- Some participants expressed concern that an overly expansive approach to regulating MEV as market abuse under MiCA Article 92 could harm DeFi - it could lead to the “death of the public mempool” if professional market makers feel they cannot engage in any MEV at all without risking liability. An overly restrictive approach could push towards centralization.
- A key point of discussion was distinguishing between “good” and “bad” forms of MEV:
Article 92 imposes an obligation on anyone professionally arranging or executing crypto asset transactions to have measures to detect, prevent and report market abuse.
- There was discussion and debate about the scope of who this applies to:
- One interpretation is that Article 92 applies only to crypto-asset service providers (CASPs) that are executing orders or arranging transactions on behalf of clients. The language seems to have been copied from the Market Abuse Regulation (MAR) which applies to investment firms providing those services.
- However, the wording in Article 92 is broader and does not explicitly limit the obligation to just CASPs. It says it applies to “any person” professionally arranging or executing transactions.
- The European Securities and Markets Authority (ESMA) has interpreted similar language in MAR to apply not just to brokers/firms acting on behalf of clients, but also to proprietary traders trading on their own account in a professional capacity.
- Since Article 92 is part of Title VI which deals with market abuse, an argument can be made that it should be interpreted more expansively in light of the goal to protect overall market integrity, not just clients of CASPs.
- However, applying it so broadly to any professional market participant could have unintended consequences. For example, it could make it riskier for validators, block builders, MEV searchers etc. to operate if they have to ensure there is no market abuse in the transactions they include.
Participants noted the lack of a safe harbor provision for buyback and stabilization programs in MiCA, unlike in the Market Abuse Regulation (MAR), and the challenges this poses.
- The participants raised the question of what ESMA’s policy should be regarding this issue, as it is a practical concern for DeFi players. They noted that in traditional finance, buybacks tend to be gated and known to stakeholders, including asset-holders and regulatory authorities. In contrast, in the crypto space, it may be difficult to ascertain when buybacks are being made and by whom, which could be why MiCA does not provide a safe harbor for these programs.
- The lack of clarity in MiCA regarding buyback and stabilization programs creates uncertainty for market participants and may require them to look to the MAR for guidance on how to structure such programs to avoid being considered market manipulation.
