Opinion: The European Union’s Data Act renders true smart contracts illegal
Disclaimer: The opinions expressed in this article are solely those of the author and do not represent the views and opinions of crypto.news’ editorial team.
Conspiracy theorists have long warned about the infamous “internet kill switch,” claiming that any method by which authorities can shut down the internet poses a threat to the free flow of information and expression, potentially leading to censorship and control.
Similar measures resembling an internet kill switch have already been implemented in countries like China, Iran, and Egypt. In fact, the United Kingdom passed legislation introducing an internet kill switch as early as 2003. Given this context, it is not surprising that the European Union has now proposed a crypto kill switch in the Data Act, which became law on January 11, 2024. This poses a significant threat to the fundamental principle of immutability in crypto, where a blockchain’s history cannot be altered. Unfortunately, the industry was not vigilant enough as this legislation made its way through the European tripartite and became law.
Article 30 of the Data Act is particularly concerning, as it effectively serves as a kill switch for smart contracts at the smart contract layer. It mandates the termination of automated data-sharing agreements in the event of a security breach, completely undermining the concept of immutability. Smart contracts are explicitly designed to be uninterrupted and resistant to termination. They cannot even be upgraded in many cases. If the Data Act is enacted, it would drastically change the utilization of smart contracts in the European Economic Area (EEA).
Blockchain technology aims to preserve the entire history and data trail of an event. If authorities have the power to manipulate, replace, or falsify data on the network, they can essentially rewrite modern-day history, much like distorting the simple equation of 1+1=3.
If Article 30 of the Data Act applies to public networks, it would essentially kill the European crypto industry, rendering truly decentralized smart contracts illegal. Smart contracts represent innovation because they cannot be terminated or interrupted by any intermediary with control over a smart contract kill switch, whether it be the smart contract creator, public authorities, or the courts.
The fact that there is not a significant resistance against access control mechanisms, which contradicts the permissionless nature of public blockchains, does not bode well for the future of crypto in Europe.
Parties that enter data-sharing agreements through smart contracts would have to comply with Article 30. It remains unclear whether this includes decentralized finance (defi), as well as the circumstances in which “access control” is granted and how the kill switch is triggered.
In a continent that was once optimistic about its approach to crypto, the future has become uncertain with the recent passing of the Markets in Crypto Assets (MiCA) legislation. Instead, we may witness capital flight, stunted innovation, and the absence of a true European blockchain industry.
As it stands, Article 30 will likely have unintended and dramatic consequences for Europe’s crypto industry, as well as its global competitiveness. For example, the definition of “Smart Contracts” in the legislation needs to be refined to prevent public blockchains from being excluded from the European market.
Regulators have various options available to create a more reasonable Article 30, such as applying these rules only to enterprises and not software and developers. Lawmakers must reconsider and provide clarity on crucial aspects of Article 30, or else they risk driving an entire industry overseas.
Despite some minor opposition from crypto companies, the Data Act was passed with 500 votes in favor and only 23 against. More opposition is needed.
Now is the time for the European crypto industry to demonstrate its unity as a community and demand that lawmakers clarify and potentially amend Article 30 of the Data Act to secure the future of blockchain within the bloc. As it currently stands, Article 30 poses a threat to defi, which relies on public blockchains and smart contracts. The internet serves as the modern public record, and smart contracts have the potential to safeguard it, unless we allow EU authorities to alter it permanently.
