The Data Act and the Requirement for a Smart Contract “Kill Switch”
The European Parliament has approved the Data Act, which includes a clause mandating the ability to terminate smart contracts. The legislation received 481 votes in favor and 31 against, and it now needs approval from the European Council to become law. The Data Act stipulates that smart contracts must be interruptible and terminable, which goes against the decentralized nature of blockchain technology. However, these requirements are likely to apply only to smart contracts governing data sharing agreements regulated by the Data Act.
Enforcing a “Kill Switch”
If the Data Act becomes law, smart contract deployers will need to self-assess compliance and issue an EU declaration of conformity. However, the act’s definition of smart contracts is expansive and lacks precision on when interruptions or terminations should occur. The regulation could hinder blockchain innovation in the EU due to strict requirements and burdensome conformity assessments. On the positive side, increased standardization could lead to greater adoption of smart contracts beyond data access agreements regulated by the Data Act.
Impact on Blockchain Adoption
There is ongoing debate about how the Data Act will impact the blockchain industry. Some believe it could lead to a retreat or hinder adoption. Provisions such as geo-fencing services for regulatory compliance may hinder smart contract adoption in Europe. While there is an aversion to regulation in parts of the crypto ecosystem, regulation can provide user protection and reduce risk in transactions. Developers will need to work within these confines while ensuring user satisfaction.
Don’t Make Perfect the Enemy of Good
The EU’s regulatory landscape provides visible rules for businesses employing smart contracts, unlike many jurisdictions. In contrast, the US lacks federal smart contract laws and has few state laws on the matter. The EU is generally more cautious and regulation-focused, setting harmonized rules for data sharing arrangements. While the Data Act is progressing, the true scope of the law will only be known once it comes into effect.
Hot Take: The EU’s Approach to Smart Contract Regulation
The European Union’s approval of the Data Act and its requirement for a smart contract “kill switch” reflects the EU’s cautious and regulation-focused approach. While this may hinder innovation in the short term, it provides a visible set of rules and user protections for businesses employing smart contracts. Increased standardization could lead to greater adoption of smart contracts beyond data access agreements. As with any new regulations, there will be challenges and adjustments, but ultimately, these regulations can contribute to the overall safety and integrity of the blockchain industry.
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