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EU Parliament Approves Data Act: Raises Concerns for Smart Contracts

Algoine News
Summary:
The European Parliament has approved the controversial Data Act, which mandates the inclusion of a "kill switch" in smart contracts. The legislation, which requires smart contracts to have the ability to be stopped or ended, gained strong support in the Parliament. Lawyers have voiced concerns that this could hinder blockchain innovation in the EU, and the potential impact on the creation and use of smart contracts remains uncertain. The implementation of such a kill switch could enforce additional compliance requirements on developers, possibly leading to delays and increased costs.
The European Parliament has greenlighted a divisive piece of legislation known as the Data Act, which includes a provision necessitating the ability to deactivate smart contracts. Shaping the law to implement a "kill switch" in smart contracts, the Data Act was promulgated in an official statement on November 9, backed by a comfortable majority with 481 votes for and only 31 against. The next stage before it officially becomes law is an endorsement by the European Council. The draft of the Data Act explicitly specifies that it should be possible to 'interrupt and end' smart contracts, compelling the inclusion of safeguards that allow contracts to be paused or reset. It is yet unclear how these kill switches would be realized, and the potential impact on the creation and employment of smart contracts remains indistinct. Conversations with lawyers Scott McKinney and Laura De Boel from Wilson Sonsini Goodrich & Rosati revealed their opinion that such a kill switch is fundamentally incongruent with the concept of a smart contract. They pointed out that the Act's description of a smart contract is overly broad, and could extend to include computer programs that currently wouldn't be categorized as a smart contract. Their perspective is that the EU Data Act's provisions impacting smart contracts are likely to pertain to a relatively small segment of smart contracts that pertain to 'data sharing agreements' under the auspices of the Data Act. Gracy Chen, Bitget cryptocurrency exchange's managing director, opined that introducing a kill switch infuses a centralizing element that could undermine faith in smart contracts. The enforcement of a kill switch would require smart contract creators to self-verify compatibility with important prerequisites and pronounce an EU conformity declaration, as per Pavel Matveev, Wirex co-founder and CEO. Lawyers McKinney and De Boel expressed the possibility that this regulation could impede blockchain innovation in the EU due to its stringent prerequisites and potentially onerous conformity assessments. However, they pointed out that the Data Act offers the assignment of drafting standardized regulations for smart contracts to European standardization organizations, which could aid the use of blockchain protocols in the EU. According to Arina Dudko, head of corporate payment solutions at the cryptocurrency exchange Cex.io, as regulation tightens around crypto firms, many have turned to transparency and meticulous reporting to comply with directives. She utilized the development of car safety regulations as an analogy to the evolution of blockchain regulations. Dudko added that just as safety regulations eventually led to safer roads and vehicles, the EU's Data Act could eventually lead to better protections for users of blockchain technologies. There's ongoing debate about the impact of the EU's Data Act on the industry with fears it may hamper adoption. Arina Dudko views regulation as a hindrance only to those with limited foresight. Implementing the kill switch could impose additional compliance expectations on developers, thus increasing costs and causing delays, according to Gracy Chen. While the EU’s regulatory framework offers some potentially significant challenges to businesses using smart contracts, it also outlines a set of standards that are currently absent. In fact, different U.S. financial watchdog agencies still don’t agree on how to define cryptocurrency. The EU's approach is generally more regulation-leaning compared to other major economies. It remains to be seen how the industry will adapt to this proposed law.
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Published At

11/24/2023 2:20:20 PM

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