Regulators Need To Establish Whether MEV Is Illegal: BIS Report

The Bank for International Settlements has suggested that new regulatory approaches may be needed to address market manipulation by blockchain miners and validators.

BIS Likens MEV to Illegal Market Manipulation

MEV seems to have become a new subject of interest for global financial institutions.

A new research paper published by staff members of the Bank for International Settlements Thursday has likened maximal extractable value (MEV) in permissionless blockchains to illegal market manipulation, including prohibited activities such as front-running by brokers in traditional markets. To begin combating this alleged manipulation, the paper has suggested that global regulatory bodies must “establish whether value extraction by miners constitutes illegal activity.”

The paper, titled “Miners as intermediaries: extractable value and market manipulation in crypto and DeFi,” explains MEV and its implications for “blockchain-based finance,” and draws regulatory implications for miners and the broader crypto industry. MEV refers to the profits miners or other parties earn by extracting value from blockchain users by leveraging their discretionary power to sequence or reorder transactions within blocks. Typically, MEV affects blockchain users interacting with decentralized, fully on-chain applications such as automated market makers and money markets. By leveraging this power, miners can front-run, back-run, and “sandwich” unsuspecting users’ transactions to extract extra profits by manipulating, for example, the prices of assets on decentralized exchanges. 

Commenting on MEV, the bank for central banks stated in the paper that it represents “illegal front-running by brokers in traditional markets.” It also argued that “MEV is an intrinsic shortcoming of pseudo-anonymous blockchains, and that addressing “this form of market manipulation may call for new regulatory approaches to this new class of intermediaries.” 

Concerning the potential implications of MEV on blockchain-based finance, the bank said there are “several open questions on whether current regulation on insider trading is directly transferable to MEV.” Regardless, regulators should not “uncritically accept” the claims developers and miners make about decentralization to “shield themselves from legal liability,” the paper argued.

In conclusion, the BIS wrote that MEV and related issues may be tackled in permissioned blockchains based on networks of trusted intermediaries whose identities are public. “Here, because the identity of any attacker would be known, it could be held accountable under regulation,” the bank said.

Disclosure: At the time of writing, the author of this piece owned ETH and several other cryptocurrencies.