Paradigm’s Concerns to the SEC
In a significant communication directed at the US Securities and Exchange Commission (SEC), Paradigm, a prominent venture capital firm focused on cryptocurrency investments, has raised concerns regarding the potential adverse effects of regulatory actions on Maximal Extractable Value (MEV). The response, crafted by Alexander Grieve, Vice President of Government Affairs at Paradigm, alongside Rodrigo Seira from Cooley LLP, centers on a detailed report titled ‘The Key Neutrality of Baselayer Markets’.
Regulatory Measures and Market Impact
The document underscores that the imposition of regulatory measures could disrupt the evolving and self-regulating nature of the crypto market. Instead of pursuing strict regulation, the authors advocate for a more flexible, tech-neutral policy approach to encourage innovation while preserving the essential decentralization that characterizes this burgeoning field.
While acknowledging that certain aspects of MEV could lead to undesirable market consequences—such as traders experiencing executions below expected prices—the authors emphasize that the market is already finding effective solutions to these challenges through ongoing technological advancements. They assert that even if MEV impacts transactions governed by securities law, it would likely not constitute market manipulation or insider trading as per existing legal standards. According to Paradigm, MEV can align with the best execution principles recognized in US finance.
Recommendations for the SEC
In an effort to assist the SEC’s Crypto Task Force, which is currently seeking clarity on various regulatory concerns—including questions posed by Commissioner Hester Peirce—Paradigm aims to illuminate the complexities surrounding MEV, defined as the maximum profit miners or validators can derive from manipulating the order of transactions in block production.
Paradigm cautions the SEC to be careful in its regulatory approach to MEV and the blockbuilding ecosystem, underlining that the agency’s responsibilities to safeguard investors should coexist with its mandate to promote capital formation and innovation in the sector.
One of Paradigm’s key recommendations is that the SEC establish opt-in disclosure guidelines specifically aimed at decentralized finance (DeFi) platforms. This would allow companies seeking to engage with SEC-registered trading activities to transparently communicate the technological measures they employ to address MEV. Additionally, the firm suggests the SEC explore the feasibility of enabling registered exchanges to operate as blockbuilders on Layer-1 networks. Such measures could help prevent centralization and conflicts of interest, thereby supporting a decentralized infrastructure.
The Importance of Neutrality
Finally, Paradigm emphasizes that while the baselayer markets of cryptocurrency are relatively new, the infusion of risk capital and ongoing research is driving their efficiency. The firm argues for maintaining neutrality in those foundational markets, as it is vital for the continued evolution of decentralized protocols and ensuring equitable access for all users involved in this innovative domain.
