The Data Bill, a controversial piece of EU legislation that includes a provision requiring the ability to terminate smart contracts, has been approved by the European Parliament. If introduced, the legislation would require smart contracts to have a “kill switch”.
In a press release on November 9, Parliament announced that the bill passed with 481 votes in favor and 31 against. The next step for the bill to become law is approval by the European Council.
In its current form, the Data Law stipulates that smart contracts must have the ability to “interrupt and terminate” and mandates controls that allow the contract to be reset or stopped. This regulation seems to run counter to the basic spirit of blockchain decentralization.
How such kill switches will be implemented and how they will impact the development and use of smart contracts remains unclear. Scott McKinney and Laura De Boel, attorneys at Wilson Sonsini Goodrich & Rosati, told Cointelegraph that such a kill switch is “fundamentally inconsistent with what a smart contract is” and how it should be viewed.
They added that the definition of smart contracts in the Data Bill is “too broad” and may include computer programs that are not currently considered smart contracts. They added:
“However, it is important to understand that the smart contract requirements of the EU Data Act may only apply to a relatively small subset of smart contracts (or potentially smart contracts), namely those used to execute ‘data sharing agreements’ subject to data management. Smart contracts. Behavior.”
In light of EU requirements, including kill switches and data archiving obligations, they suggest that many companies that enter into applicable data-sharing agreements “will simply decide not to use smart contracts in their applications.”
Gracy Chen, managing director of cryptocurrency exchange Bitget, told Cointelegraph that the implementation of this kill switch “introduces an element of centralization” that could “erode trust in smart contracts, as users may be wary of relying on contracts that may be modified by external entities.” or close. “
As the EU becomes increasingly likely to enact smart contract kill switches into law, it’s unclear how it will enforce their application.
Implement a “kill switch”
Wirex co-founder and CEO Pavel Matveev said that implementing and regulating such a mechanism would allow smart contract deployers to “self-assess whether they meet the basic requirements and issue an EU declaration of conformity.”
Matveyev told Coinelegraph that the Data Bill’s definition of smart contracts is “too broad and lacks precision as to the circumstances under which interruption or termination should be initiated.”
McKinney and DeBoer believe that the regulation could hinder blockchain innovation in the EU because its requirements are “quite stringent and suppliers will need to undergo potentially onerous conformity assessments.”
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However, not everything is negative, as the lawyers point out that the Data Bill stipulates that “European Standards Organizations will be required to draft harmonized standards for smart contracts”. They added:
“Increased standardization could enhance the use of blockchain in the EU and may even lead to greater adoption of smart contracts beyond the data access agreements regulated by the Data Act.”
Arina Dudko, head of enterprise payments solutions at cryptocurrency exchange Cex.io, told Cointelegraph that as regulatory oversight of cryptocurrency companies has been established, many companies have “established systems for transparent and detailed reporting.” This system enables them to comply with applicable directives.
Dudko further compared the development of rules for blockchain technology to automotive safety and standards rules. When cars first hit the road, seat belts were not mandatory, safety standards varied widely, and when regulations were finally introduced, “some people vehemently opposed advances in safety standards before they became accepted practice.”
Over time, regulations surrounding these safety standards have saved lives and led to safer roads, she said. She compared the advances to the EU’s Data Bill, which she said was facing “a similar phase of reactionary pushback”.
Dudko said that like “emergency exits and fire codes, these accommodations are critical to ensuring that the environment and products we share are safe for all.” She said that if cryptocurrency market participants “fall into evil or Misleading Promises” and they needed a way to escape.
“While this may deter hardliners from using these resources, introducing basic user protections could welcome skeptics and crypto-curious participants from making their first transactions.”
Impact on blockchain adoption
Debate continues over how the EU data bill will impact the industry, with some arguing it could cause pushback or even hinder adoption.
Several provisions could hinder the adoption of smart contracts in Europe, including geo-fencing services to maintain regulatory compliance.
Dudko said that “unfortunately, there is an aversion to regulation among some branches of the cryptocurrency ecosystem that goes against the industry’s founding principles,” but that to her, regulation is only an obstacle for those with “limited vision.”
Dudko believes that the Bitcoin (BTC) genesis block’s reference to the 2008 financial crisis is an “explicit reference” to a “pale reaction” to the crisis, which itself was a “product of lax regulation.” She added:
“Retail customers want transactions to be less risky, and lawmakers are right to seek the ability to end transactions if the opportunity proves too good to be true. The challenge for developers now is to work within these constraints and still persist with user satisfaction degree as the goal.”
Chen said a kill switch could “impose additional compliance requirements on developers,” which could lead to delays and increased costs when deploying smart contracts.
On top of that, the validity and functionality of these smart contracts may be affected due to strict data obligations. Chen added: “The enforceability of a smart contract relies heavily on its autonomous and self-executing nature, and any intervention or interference by a third party will pose a risk to its integrity.”
Don’t let perfection be the enemy of good
While the EU’s new regulatory environment presents some significant challenges for businesses using smart contracts, it provides an imperfect but visible set of rules that do not exist in many jurisdictions.
In the United States, regulators have been accused of using an enforcement approach after suing several cryptocurrency exchanges, including Coinbase, Kraken and Binance. To date, different U.S. financial regulators have defined cryptocurrencies differently.
Chen said the EU was “generally more cautious and regulatory-focused” than other major economies, while McKinney and DeBoer said Europe “generally leads the way in regulating data-driven industries”.
“As part of the Digital Strategy, the Data Bill sets out uniform rules for data sharing arrangements. This is the first major regulation of its kind to have such specific requirements and implications for smart contracts.”
In contrast, they said, the United States has no federal smart contract law and “relatively few state laws regarding smart contracts, most of which simply state that smart contracts can be valid, binding contracts.”
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Dudko said the EU has put in place “common-sense regulations that speak to the broad public understanding and use of digital currencies,” adding that the United States and the United Kingdom “have put more emphasis on asset classification and promotional messaging, respectively,” while the EU “continues to focus on Program and project functionality sets standards. “
While the Data Bill is making progress, it has yet to be passed into law, meaning the blockchain industry still has time to prepare. The industry will only know the true scope of the law once it comes into force.
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