CONSENSUS 2023: Radix CEO discusses MiCA’s template for US crypto regulation

In this article, we’re excited to feature an exclusive interview with Piers Ridyard, the CEO at RDX Works, one of the core developers of Radix, a groundbreaking Layer 1 protocol that aims to empower developers with the necessary resources to build user-friendly decentralized applications. In this interview, we’ll be delving into how Radix has created infrastructure that can support the $400T global financial system.

Piers also provided insights into the intersection of technology and regulation in the cryptocurrency space. The conversation then shifts to the recent regulatory framework in Europe, specifically the passing of the Markets in Crypto-Assets (MiCA) legislation by the European Parliament.

So, without further ado, let’s dive into our conversation with Piers Ridyard.

RDX Works CEO initially shared his thoughts on the potential impact of MiCA on US regulations and how it provides a much-needed template around the handling of crypto assets. Piers notes that MiCA is interesting because a lot of the thinking that has gone into it has come from a number of global frameworks, including the work done by FATF. Ultimately MiCA gets the EU’s 27 members closer to being the first major trading block in the world to have a comprehensive crypto laws.

In contrast, the regulatory environment in the US is still murky due to the lack of clarity around what is considered a security in the context of cryptocurrencies. This uncertainty is holding up efforts to establish clear guidelines, which is a necessary step for those operating out of the US jurisdiction to actually understand what they need to do to comply. Without that clarity, US crypto startups are either looking overseas or are just not bothering to start in the first place. The question of regulatory oversight of AML and KYC, as well as the actions of the Securities and Exchange Commission (SEC), are also complicating matters and making it difficult to determine if these regulations are connected or separate.

According to Piers, this lack of clarity is hindering efforts to create more straightforward regulations tailored to crypto-asset services and stablecoin issuers.

“In Europe, most countries have clarified that if an asset is a utility token for a public ledger, then it isn’t a security and won’t be treated like this. If  you are directly handling crypto assets, then you must apply KYC AML rules, which seems reasonable and leaves the playing field relatively open for a broad variety of token types to be issued in European markets.”

Overall, Piers believes that MiCA’s clarity will encourage more people to build and launch crypto companies in Europe. He notes that this increased divergence could lead to a “brain drain” of talent from the US to Europe, as remote working becomes more common and successful European businesses attract American employees.

While Europe has made some progress in clarifying its regulatory framework for crypto assets, it’s important to note that the licenses currently available are mainly found in smaller Eastern European countries. When considering Europe from a geopolitical and economic standpoint, Germany, France, and Italy are often the first countries that come to mind to ensure a level playing field for all companies operating in the continent.

Piers stressed that having a common set of regulations for the entire EU would ensure complete uniformity, which would increase the likelihood of compliance with any future regulations in the United States. So it’s important to avoid a scenario where there is regulatory arbitrage, and companies have to navigate different rules in different regions. While individual regional regulation can be effective, without uniformity, it could lead to more issues. This has been a common issue for the European markets for some financial regulations, , and we want to ensure “we don’t repeat those mistakes.”

Further elaborating on this topic, Piers explains that most European states have so far decided that if a digital asset does not meet the textbook definition of a security it will not be considered a security. Therefore, the majority of the digital asset regulations are focused on the enforcement of KYC/AML rules. In most countries, digital assets are treated as cash-like assets, and therefore, the equivalent of a money transmitter license or adherence to KYC/AML regulations is required.

This approach differs from that of the United States, which seeks to regulate the issuance and sale of tokens as securities. Overall, the European approach is viewed as positive, as it provides clarity for businesses and investors, though it currently deliberately refrains from regulating decentralized finance (DeFi) or non-fungible token (NFT) activities.

“From the European Union’s perspective, directives are created and then implemented as local laws with specified guidelines to follow. Rather than individual nations like Germany leading the way, it’s more likely that the EU will work out the directives that should be applied and then implemented in each country.

As a separate case study, the UK’s approach to regulating crypto is also being focusing on handling crypto assets rather than regulating crypto assets themselves.. Some smaller European countries are also adopting a similar approach. There is confusion when it comes to crypto licenses as they typically only apply to KYC and AML standards rather than dictating what can and cannot be done with tokens and NFTs. While the US is focused on regulating the issuance and sale of tokens as securities, Europe is more concerned with whether or not these assets  are handled according to 5AMLD. The enforcement of KYC and AML regulations for digital assets is being treated similarly to cash assets within most countries in Europe. Overall, the difference in regulatory approach between Europe and the US is positive as long as people understand the guidelines.”

Despite a prolonged ‘crypto winter’ last year, many startups did hunker down and continue to work on developing new products or improving existing ones, in anticipation of a potential resurgence in the market. Some argue that we are currently experiencing a crypto spring, which brought renewed attention and interest to the industry.

Piers Ridyard highlights that there was actually more innovation happening during the crypto winter despite the slowdown in what he calls “the speculation and gambling side” of the sector.

In terms of their business, the layer 1 protocol RDX has helped to develop, Radix, is making it easier for developers to build Web3 and DeFi applications. We can imagine that the complexity and risk of building in the crypto space would be a huge barrier to entry for many developers, so Radix is helping to overcome that. The CEO also noted that there’s been no slowdown in the growth of number of developers interested in building on the Radix platform, even during the bear market.

With only about 30,000 full-time Web3 developers compared to the 25 million full-time developers in the wider space, Radix aims to create a platform that simplifies the development process for smart contract developers. Radix launched its programming language, Scrypto, a year and a half ago in the middle of the bear market. Since then, the company claims to have attracted over 10,500 developers to try building with its programming language. Overall, the network has been designed to prioritize scalability, security, developer experience, and user experience, making it the first of its kind in the industry to lead the way in mainstream DeFi adoption.

Despite the difficulty and risk of being a smart contract developer in the cryptocurrency industry, there continues to be a strong resurgence in new DeFi products being developed, and why developers continue to work on improving products.

Right now, A single line of code can result in a  billion  dollar hack, making coding in DeFi a terrifying and challenging task, Piers further explains, Radix and the programming language we developed to make it as easy as possible to build secure DeFi applications, is designed to fix this critical issue.

The travel rule is a regulation that requires financial institutions, including crypto firms, to screen, record and share customer information with other institutions when transferring funds between accounts. This regulation is intended to prevent money laundering and other illicit activities.

Currently, it is unclear how the travel rule will be applied to DeFi. In many cases, decentralized application are likely to shift the question of travel rule compliance from the venue, to the participants.. The travel rule currently applies only to institutions. However, as the DeFi space matures and institutional capital flows in, companies  using DeFi may be interpreted to fall under the travel rules.

An entity that declares itself as an AML/KYC compliant platform, Piers continues, will need to specify the jurisdiction (or jurisdictions) under which they operate.  Depending on the rules of those jurisdictions, it is likely that the travel rule will apply to those entities who deal with each other via DeFi applications. Just because it is decentralized does not mean that regulation will not apply somewhere – enforcement of the actions of the participants are the most likely place for institutional DeFi regulation.

Regulators in most jurisdictions are not trying to stop businesses from operating, but the manner in which that regulation should be applied to DeFi is still unclear.