November 12, 2023

European Parliament Passes Data Act Featuring Smart Contract Kill Switch Despite Industry Opposition

In the face of resistance from cryptocurrency industry stakeholders, the European Parliament has approved the Data Act, a legislation with the potential to significantly impact smart contract platforms.

On Thursday, November 9, members of the European Parliament endorsed the Data Act, which contains a controversial provision that could render a majority of smart contracts illegal.

The Act, centered on regulating data sharing, received 481 votes in favor and 31 against. The legislation now awaits formal approval from the European Council, comprised of the heads of state from the 27 member nations.

The approved Data Act includes a stipulation mandating that smart contracts must be susceptible to interruption and termination, incorporating controls for functions that reset or halt the contract.

Essentially, the Data Act aims to provide users access to data generated by smart devices, addressing the European Commission's claim that 80% of such collected data goes unused.

The finalized bill released in July includes a provision specifying that automated data-sharing agreements must be safely terminable. The July 7 text referred broadly to 'smart contracts' rather than privately owned and permissioned data records.

Smart contracts are automated tools executing transactions based on predefined conditions. Organizations associated with blockchains, such as Stellar, Polygon, NEAR, and Cardano, expressed concerns in an open letter during that period.

Critics of Data Act Point Out Flaws Impacting Smart Contracts

Critics of the Act have raised concerns about the broad definition of the smart contract clause, emphasizing the lack of clarity on specific instances for interruptions or terminations.

Contrarily, the European Commission has stated that the Data Act does not specifically address blockchain, and concerns that the Act would criminalize smart contracts are deemed unfounded.

The battle against freedom: The European Union's Regulatory Grip on Blockchain Decentralization

"This almost feels like a back-end way to regulate or not allow any smart contract-based systems to be fully decentralized," said Rebecca Rettig, chief policy officer at Polygon Labs.

Some key players offering smart contract solutions have criticized the EU parliament for introducing this controversial Data Act. Rettig said:

"If you put restrictions for a termination provision on all smart contracts, you basically require some point of centralization and you eliminate the permissionless, autonomous, automatic nature of smart contracts."

The creation of MiCA spanned several years and underwent numerous revisions, ultimately providing a well-defined framework for developing the cryptocurrency industry in the EU, according to Rettig. In contrast, other bills with potential implications for the crypto sector, such as the Data Act or the Anti-Money Laundering Regulation, progressed at a faster pace.

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