EU Data Act’s ‘kill switch’ provision for smart contracts raises concerns

The European Council and Parliament’s recent consensus on the Data Act brings to light potential challenges and considerations for crypto in the EU.

On June 28, an agreement was reached between the European Council and Parliament on the Data Act, pushing forward legislation pertaining to non-personal data. The Act aims to extend the provisions of the 2020 Data Governance Act, born out of the European Strategy for Data. Before becoming enforceable, it requires the endorsement of the European Parliament and the Council, which speaks for the EU’s 27 member nations.

The impending Data Act holds particular significance for the crypto domain. Central to debates is the introduction of a “kill switch”, a feature designed for the termination or suspension of automated data-sharing agreements in case of security compromises.

Specifically, the ambiguity surrounding the definition of smart contracts and the broad categorization proposed by the Act has raised concerns among blockchain professionals. The Act does not distinguish between standard digital contracts and those based on distributed ledger technology (DLT), leading to potential confusion in its application.

Marina Markežič, of the European Crypto Initiative, highlighted the Act’s lack of specificity regarding the conditions for triggering the “kill switch.” Given blockchain’s inherent immutability, implementing such a feature poses inherent challenges. The Act’s vagueness on what constitutes a “data-sharing agreement” further compounds the uncertainties.

There are also questions about how the Act might influence decentralized finance (defi). As of now, the European Union doesn’t have defined regulations for defi, making the Act’s implications in this space somewhat nebulous.

Erwin Voloder, who is affiliated with the European Blockchain Association, emphasized potential hurdles, especially if public networks come under the Act’s purview. Such an inclusion could carry implications for business operations within the EU.

Various global crypto entities, including well-known names like Polygon and Stellar, have articulated their reservations, stressing the need for clearer distinctions in the Act. There’s a broader concern about how the Act might intersect with the MiCA regulation, slated for 2024 implementation.

In its current form, the Data Act underscores the necessity of clarifying regulations in crypto. However, it is raising more questions than answers, indicating a clear need for dialogue and collaboration among industry stakeholders and European regulators.

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