The Data Act — a contentious piece of European Union legislation that includes a clause requiring the ability to terminate smart contracts — has been
The Data Act — a contentious piece of European Union legislation that includes a clause requiring the ability to terminate smart contracts — has been approved by the European Parliament. If introduced, the legislation will require a smart contract to have a “kill switch.”
In a Nov. 9 press release, the parliament announced that the legislation was passed with 481 votes in favor and 31 against. The next step for it to become law is to gain the approval of the European Council.
In its current form, the Data Act stipulates that smart contracts must have the capability to be “interrupted and terminated,” and it mandates controls that allow for the resetting or halting of the contract. The stipulation appears to be a significant departure from the blockchain’s foundational ethos of decentralization.
How such kill switches would be implemented, and how they could impact the development and use of smart contracts remains unclear. Scott McKinney and Laura De Boel, attorneys with Wilson Sonsini Goodrich & Rosati, told Cointelegraph that such a kill switch is “fundamentally incompatible with what a smart contract is” and how it’s viewed.
They added that the definition of a smart contract included in the Data Act is “overbroad” and likely to encompass computer programs that wouldn’t currently be considered a smart contract. They added:
“However, it’s important to understand that the EU Data Act’s smart contract requirements will likely only apply to a relatively small subset of smart contracts (or potential smart contracts), i.e., smart contracts for executing of ‘data sharing agreements’ governed by the Data Act.“
Given the EU’s requirements — including the kill switch and data archiving obligations — they suggested that many companies entering applicable data sharing agreements “will simply decide not to use smart contracts in their applications.”
Gracy Chen, managing director at cryptocurrency exchange Bitget, told Cointelegraph that the implementation of such a kill switch “introduces a centralized element,” which may “erode trust in smart contracts, as users may beware of relying on contracts that external entities could potentially modify or shut down.”
As the EU moves closer to potentially cementing a smart contract kill switch into law, it’s unclear how it would enforce its application.
Enforcing a “kill switch”
Implementing and regulating such a mechanism would, according to Wirex co-founder and CEO Pavel Matveev, see smart contract deployers “self-assess compliance with essential requirements and issue an EU declaration of conformity.”
Matveev told Coinelegraph that the Data Act’s definition of smart contracts is “expansive and lacks precision regarding the circumstances under which interruptions or terminations should be initiated.”
McKinney and De Boel believe the regulation could hinder blockchain innovation in the EU as its requirements are “quite strict, and vendors will need to go through potentially burdensome conformity assessments.”
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Not everything is a negative, however, as the attorneys noted the Data Act provides “that European standardization organizations will be requested to draft harmonized standards for smart contracts.” They added:
“Increased standardization could strengthen the use of blockchain in the EU, and could even lead to greater adoption of smart contracts outside of the data access agreements that are regulated by the Data Act.”
Arina Dudko, head of corporate payment solutions for cryptocurrency exchange Cex.io, told Cointelegraph that as regulatory oversight of crypto companies builds, many have “settled on a system of transparency and detailed reporting.” That system has seen them adhere to applicable directives.
Dudko further compared the development of rules around blockchain tech to safety and standards rules for automobiles. When cars first hit roads, seatbelts weren’t mandatory, safety standards varied wildly, and when regulations were eventually introduced, “some vehemently fought progress in safety standards before they became accepted practice.”
Over time, she said, regulations surrounding these safety standards saved lives and led to safer roads. She likened these advances to the EU’s Data Act, saying it’s been facing a “similar phase of reactionary blowback.”
Dudko said that much like “emergency exits and fire codes, these accommodations are critical to ensuring the environments and products we share are safe for all.” Crypto market participants, she said, need a way to escape if they “get locked into a nefarious or misguided commitment.”
“While this could discourage hardliners from engaging with these resources, introducing basic user protections could serve to welcome skeptics and crypto-curious…
cointelegraph.com
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