Diana Stetiu - MEV & MiCA: Market Abuse or Innovation?

Good morning everyone. Super cool. We have more people here. So this morning I'm going to talk to you about um a very hot topic uh within uh ESMA European Security Markets Authority. um they made like extensive public consultation uh with the web3 sector to determine uh what is market abuse in this sector and how it should be regulated.

So I um thought that it will be good to tackle uh this topic with you today and I will give you like um a question to see if you can find something in common. So think about um front running bots or 30 seconds reorgs or maybe you are just thinking to seed uh do a funding in uh in your startup. Do you feel like maybe could be something in common with these things? It could be for example in certain circumstances this could be a market abuse and um I'm not I'm not here to kill innovation actually I'm here to make sure that it survives regulations um and be mindful that uh European Union is not just like building some niche compliance sandbox on the contrary The EU launched the most regulated framework, the most comprehensive uh super complex and this is Mika and I would say is the most comprehensive uh crypto rule on the planet and Mika is not just another regulation. Um because if you for example are writing solidity, uh maybe you are validating blocks, maybe you are um designing tokconomics, but in a way or another you need to be Mika compliant.

And regulation is not opposite to decentralization. It's how we legitimize it and how we move from the fringe to the financial core. And basically you see here in my honest opinion mika it's Europe's crypto constitution and uh it governs a lot of aspects uh how you do the trading if you're a trading platform how you keep the custody in custody the crypto assets of the clients and in co in in case you want to issue a stable coin of course you're under Mika um and it applies in certain aspects effects irrespective of what is the underlying technology and also you need to be um aware that mika doesn't travel alone it drags with it uh the anti-money laundering it drags with it uh the digital operational resilience act the dora the GDPR and our old friend market abuse regulation from the traditional finance which was very inspirative for Esma to put it in Mika apparently. Yeah. So let's move forward.

There are some certain um um chapters. It's title six under Mika and with particular articles uh which define what is market abuse um if it is insider dealing or trading, unlawful disclosures, market manipulation. We have precise terminology for this and guidelines how to comply with those and when you translate those from Mika which of course they govern the centralized uh web3 space but you need also to be aware that there is this tendency willingness from the European Union and especially European security markets authority to look very um cautious to the defy and see if defy is really defy it's indeed decentralized and if it's not decentralized as we sometimes the projects claim we are um to uh be to fall under the regulations basically and um when you are promoting a um a project, you need to be super careful how you convey the information to the public. If you burn some tokens, if you um promote yourself in Discord, how you're going to do that in order not to seem like you are prepositioning yourself to something. Um and also to to be aware of the sandwich attacks.

So um the the maximum extractable value MIV um was put in consultation by ESMA with the web3 sector and um companies association gave feedback very extensive and there are some sorts of let's say legitimate uh MIV and some of them are not at all Okay, they fall under the regulations. For example, I would say that um arbitrage would be the less um problematic. It has like a low risk level and it's arguable legitimate. But if we talk about sandwich attacks, liquidation bots or time bandit reorgs, it's a very high risk level. And uh depending on how exactly uh you are really really really uh decentralized or you to a certain extent are centralized, you may fall under the articles of the Mika.

You may fall under article 91 manipulation or you you could fall under the inside trading and um consequences come with that. So Europe is really watching what the crypto sector is doing and um what happens between the mool and the block and because um ESMA didn't seem to care too much uh about best efforts and they listened when they collected the input in the consultation in the public consultation from the web pre sector but they didn't really implement it what we the sector desired. So they were very technical, very to the point and um also quite traditional be because they keep the market abuse regulation from the traditional finance very closed to their mindsets. And they decided that um if you are a person who is professionally arranging or executing transation, you fall under the Mika regulation under the specific title six where it's about market abuse and you need to be compliant meaning you need to have policies and procedures and to um detect and prevent any market abuse. So if you are reordering, batching, matching transaction, you likely fall under the regulations, meaning that you will need to detect and prevent market abuse and here it was like um a big debate um from from the sector.

um companies replied to ESMA in the public consultations that um it will be difficult for them to be compliant with the MIV detection and protections and they argued that um validators cannot reorder the blocks and this is true. This is true because after the merge of Ethereum in 2022, um the validators could not see anymore what's in the block, but the builders can, the searchers can, and the relays also can. So in in that context um you need to be aware that if you are if you are uh taking advantage of reordering the transaction you might be doing some front running which is um which comes with consequences of course of course the let's say the um black and white no gray area here is no gray area if you are an OTC desk trading platform um on ramp crypto and or you're executing orders on behalf of the clients or you are um doing reception or transmissions here it's no doubt you need to have policies and procedures to detect and prevent market abuse and in case in case something happened uh in your ecosystem um you will need to report that and ESMA put it a specific report called suspicious transaction order report that you need to fill in. It's super extensive pages and pages um and basically expla explain was it in a a permissionless DT uh where it happened was it onchain was it offchain um who who what are the characteristic of that suspicious transaction and file that as soon as possible to the national authority. Yeah.

So we move forward as I was saying um validators are not considered now persons professionally arranging or executing transactions because they cannot see anymore what's in the block. Uh but the builders and searcher do have visibility. also the relays as as gatekeepers um can be in in this uh this um part with the MIV really really connected and when we have the power we also have the responsibility and um as as um the authorities found it correctly if you can frontr run you can manipulate So I believe that um we need to move our mindset and uh from the way we designed the protocol to the way we uh utilize the protocol it should be compliance all over the steps. And here based on article 92, I gave you like a checklist um how how you need to put in your um company in your ecosystem um the right steps and the right things in order to be able to detect and prevent suspicious transactions. So basically you need to have a real time monitoring a tool.

Uh there are a couple of tools that from my knowledge they are basically utilized by trading platforms and exchanges because they are designed for uh these trading venues to make sure that the maker the taker when it's like a a hub for transactions is not happening any uh sort of um market abuse but even like inhouse inhouse um uh developing of software tools tools. It's another possibility if you have the capabilities internally to design your tools uh to notify you to monitor and um flag if something it's happening. You you are also welcome to use your own capabilities. And basically you have to have this pipeline of notification for suspicious transaction order report to be able to do it to your national regulators and um to have the MIV policy disclosure. um to do some compliance training for uh your people and if you are in a DAO to have a super organized way of doing business in in such a context because um we say that it's decentralized but sometimes uh a bunch of people do have the power and it's not that decentralized.

Okay. So I believe um compliance will become more and more the main focus even for developers and for builders and relayers and compliance has a a price indeed. ESMA um inquired the web3 sector um if it will be hard for for the sector to be compliant and what costs are estimated. And the majority of respondents said that they believe that for um a small company just to implement market abuse detection and prevention, it's going to be a cost of uh 1030K per year. Uh and if you are like a bigger company um it could go up to 300K annually because you need real time surveillance full stack audit trails.

So basically uh this is a cost that if you are in a centralized and in a centralized ecosystem and you realize that you are centralized and not in DeFi um you need to factor this cost and put it on your budget list and try to be compliant as soon as possible because after Mika got in place 30 of December 2024 um the part with the market abuse became totally applicable and it's not under a grace period. It's not under a grandfathering rules. Um it became absolutely applicable and yeah the sector wanted some um extension to be able to comply. The authority received that response but didn't honored that response with a yes. On the contrary, they said no, it's going to be applicable starting with um 30 of December 2024.

Okay. So, um talking now about Ethereum, Ethereum legal future for Ethereum. I believe we um we have this cool thing that happened in 2022 when uh it was the merge and uh basically um the validators were not able to see any anything more that was in the block which made Ethereum um when they migrated from from the proof of work to the proof of stake let's say more compliant in that sense because uh that temptation for the validator to reorder the transaction in order to gain financial advantages um basically was eliminated. And um it's super important to um look how things are happening in your um communications in your telegram uh in in your discord as I was previously mentioning and be mindful that if you position in your in a way or people from your company that could be accused of insider dealing or if they could be prepositioned ing themselves knowing that something cool will happen and money will come from that. Um it's it's indeed um a very um hard circumstance then to explain yourself to the authorities and it's not going to be or on we didn't know uh we've just um started to do the same things that it's the majority in the in the crypto space.

We didn't know it and we want now to be uh excused. It's it's not going to work. Okay. Okay. So, um if we want to build, we should build on solid legal ground.

And Mika is not our enemy. Maybe he's not our best friend, but um it's a way to um put ourselves in a better light. Once we get compliant, I believe that more opportunities can come. uh traditional finance institutions to collaborate with the crypto space and make it um um more friendlier than it is presently for the whole people. There are opportunities with being compliant to Mika, not just um downsize.

And um I believe that Ethereum um should continue to lead. What happened in 2022 was uh not just from a technical perspective, not just from a business perspective to be able to scale better. Um I think it was also a a legal mind be behind the scenes who um was trying to uh make Ethereum be more robust, more resilient with that compliance mindset in in the future. And pretty much that's it. If you have questions, I'm happy to address them.

Thank you. [Applause]

Thank you so much for the presentation. Do we have any questions?

Can I pass you the mic?

Okay. Okay. Uh so uh who do you think what industry do you think it will be the main beneficiary of Mika being well implemented in Romania? the the industry that will um benefit the more um the most will be without a doubt um those who are in a centralized space because without this Mika license they will have um just the option to liquidate the business when the grandfathering uh period will expire or to merge with someone who has a license or otherwise Um if not basically yeah to liquidate the business or to merge otherwise they will cannot uh remain in the space and if you want to remain you need this license so it will benefit you the most to continue doing business but apart from this once you get the license I think you have opportunities you have an opportunity if you want to raise money with an IPO on London stock exchange on I don't know another exchange change from Germany, I mean national um or the Warso or whatever we have here in in the space in European Union where you could um get more investments because you are compliant. You come and say look I almost obtained like a banking license.

I prove that I have the um capital adency um credential rules corporate governance. Um the board has been approved by a national authority. We are leading this company in a full transparency protecting the customers and this is good.

Yeah. And uh maybe more topic uh perspective what what should be next once we have Mika in place? You just what will be best to have next? Well, um, speaking now from a Romanian perspective, I I I'm I'm not so confident how we will deal in our Romanian u um local part of of our European Union in in Romania with the authorities to obtain a Mika license. I'm I'm not so confident I think will go so smooth, but sooner or later they will need to to adapt and um I'm I'm looking forward to see how um SFA will receive applications.

I'm looking forward to see how the National Bank of Romania will say this is an electronic money token so I will going to um supervise you. So um it's we live in exciting times I I believe but uh I I cannot predict them. Yeah.

Do you have any more questions? I have a question for you. If we have a public mele where researchers and block producers are actually incentivized to do sandwich attacks and me because they can make more money. Why regula and they're obviously synonymous or even anonymous because you don't know who the block producer is. Why regulators expect companies to then regulate that when it's almost impossible for companies to do, especially small companies, they're trying to emerge in this comparatively complex market.

And as a new company, if you have to pay 110,000 pounds per year just for to be compliant with Mika, you most likely would choose to go and build a company somewhere else rather than stay in EU. Like there's a two-part question like do we incentivize people to stay in EU and why do we do it this way when the game has been rigged? Okay. So basically um this with moving abroad abroad out of the European Union I mean um could be something but it needs to be analyzed very carefully because if you do something outside in Dubai in Kimon Islands or whatever um you need to be very careful if you really want European Union clients s you really want to service them and if you decided to say goodbye okay you can do that but if you still want clients in the European Union that's not a good move because uh it's not about where you are located it's where is the client located and you put yourself only in a very limited position to rely on reverse solicitation meaning that the client on its own initiative to come to you you without advertising, without soliciting any sort of ser service and uh interaction with them and basically you renounce to the European Union clients with this. Yeah.

And um that's the cost. If you don't want to stay in the European Union, you lose the clients. But I would advise to stay because it's a big market. uh it's a big market and um the license should be taken uh one from the European Union uh another from Singapore and another from United States of America to be able to do business all over the world I would say that would be my take

thanks for that do you have any more questions no more questions thank you thank you so much for the presentation taking telling us a bit more about

Thank you for your time.