{"id":21464,"date":"2023-08-23T13:10:12","date_gmt":"2023-08-23T13:10:12","guid":{"rendered":"https:\/\/nftandcrypto-news.com\/crypto\/eu-data-act-smart-contract-kill-switch-brings-uncertainty\/"},"modified":"2023-08-23T13:10:14","modified_gmt":"2023-08-23T13:10:14","slug":"eu-data-act-smart-contract-kill-switch-brings-uncertainty","status":"publish","type":"post","link":"https:\/\/nftandcrypto-news.com\/crypto\/eu-data-act-smart-contract-kill-switch-brings-uncertainty\/","title":{"rendered":"EU Data Act smart contract \u2018kill switch\u2019 brings uncertainty"},"content":{"rendered":"
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On June 28, the European Council and Parliament achieved a political consensus on the Data Act, which moves the legislation regarding non-personal data closer to fruition.<\/p>\n

Thierry Breton, European Union commissioner for the internal market, described the agreement in an X post as a \u201cmilestone in the reshaping the digital space.\u201d<\/p>\n

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Another deal!
\u2070Tonight\u2019s agreement on the #DataAct<\/a> is a milestone in reshaping the digital space.<\/p>\n

Thanks to the swift work of the EP @delcastillop<\/a> & the Council Presidency, we are on the way of a thriving data economy that is innovative & open \u2014 on our conditions. pic.twitter.com\/vTWUU8xTx9<\/a><\/p>\n

\u2014 Thierry Breton (@ThierryBreton) June 27, 2023<\/a><\/p><\/blockquote>\n

The Data Act complements the Data Governance Act of November 2020 by clarifying who can create value from data and under which conditions. It stems from the European Strategy for Data, announced in February 2020, which also aims to position the EU as a regulatory frontrunner in the era of data-driven society.<\/p>\n

The Data Act is part of the European Commission\u2019s wider data strategy aimed at making Europe a global leader in the data-agile economy. In simple terms, the Data Act proposes new rules on who can access and use data generated in the EU across all economic sectors.<\/p>\n

<\/figure>\n

For the Data Act to become law, it must be approved by a vote of the European Parliament and the Council, which represent the bloc\u2019s 27 member states. And once again, as with the Markets in Crypto-Assets (MiCA) regulation, the crypto sector is facing a major challenge. The problem raised by the new EU data law could permanently change the use of smart contracts in the European Economic Area (EEA) \u2013\u2013 and not for the better.<\/p>\n

Smart contract \u201ckill switch\u201d<\/h2>\n

The blockchain community is largely concerned about one provision in the Data Act, namely that automated data-sharing agreements contain a \u201ckill switch\u201d by which they could be terminated or halted in the event of a security breach.<\/p>\n

Many blockchain experts contend that the current definition of smart contracts in the Data Act is broad, fearing it may lead to unintended consequences for existing smart contracts on public blockchains. For example, the text of the upcoming law doesn\u2019t distinguish between just digital contracts and smart contracts utilizing distributed ledger technology.<\/p>\n

But above all, the Data Act supposedly doesn\u2019t give clear details about the conditions under which safe termination or interruption kill switch should occur, and it is hard to predict the potential outcomes with a higher degree of certainty. The smart contract architecture often doesn\u2019t allow for termination or interruption, as blockchain technology is praised for being immutable and irreversible. <\/p>\n

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The Data Act also doesn\u2019t say exactly what a \u201cdata sharing agreement\u201d is, and it doesn\u2019t explain if the smart contracts currently ubiquitous in Web3 applications follow these kinds of agreements.<\/p>\n

\u201cBy design, most of smart contracts don\u2019t offer a termination or interruption feature and are often un-upgradable to ensure higher levels of protection from abusive behaviors,\u201d Marina Marke\u017ei\u010d, executive director and co-founder of European Crypto Initiative, told Cointelegraph. <\/p>\n

\u201cThe fact that smart contracts lack such features puts their use and development at risk. They may be perceived as inconsistent with regulatory requirements.\u201d<\/p><\/blockquote>\n

\u201cThe problem is if the scope of Article 30 were to be extended beyond the application of smart contracts in this narrowly defined context, and on public permissionless networks. It becomes not only problematic but almost impossible for such protocols to comply,\u201d he said.<\/p>\n

Per Voloder, another concern is whether these rules could spill over into decentralized finance (DeFi). \u201cAs we do not have a DeFi regulation, this is a question that will need an answer over the next 18 months as the EC prepares its position on DeFi.\u201d<\/p>\n

Moreover, kill switches can have errors because of human mistakes and, in smart contracts in general, \u201cas they are rigid, bounded information environments.\u201d This rigidity, plus an automatic feature that triggers a certain outcome following strict rules, could lead to issues like locking up assets, shutting down protocols or even losing funds and important data, said Voloder.<\/p>\n

A lot of uncertainty<\/h2>\n

The Data Act has rules for vendors of an app using smart contracts, or for people whose business involves deploying smart contracts.<\/p>\n

According to Marke\u017ei\u010d, the Data Act might cause such vendors and deployers to be more cautious and consider whether their smart contracts in any way contain a data-sharing agreement. Apps might need to change how they work to meet these rules if their smart contracts share data.<\/p>\n

But first, it\u2019s crucial to understand who exactly needs to follow these rules, Marke\u017ei\u010d said: <\/p>\n

Erwin Voloder, head of policy at the European Blockchain Association, told Cointelegraph that Article 30 of the Data Act applies when parties agree to share data using a smart contract, and this contract follows the rules. It should be fine if it\u2019s only for that situation, especially when used on a controlled network where the Data Act\u2019s safety stop can be used.\u00a0<\/p>\n

\u201cIs the regulation even targeted toward DeFi platforms and protocols? […] It should be clarified under what circumstances the \u2018access control\u2019 is provided, what, who, why and how the \u2018safe termination or interruption\u2019 measure is triggered and how protocols prevent further abusive behavior thereof.\u201d<\/p><\/blockquote>\n

Marke\u017ei\u010d stated that, in the past, some changes and terminations were made on a protocol layer as part of the overall governance mechanisms.\u00a0<\/p>\n

A kill switch on the level of a smart contract might lump projects and individuals into \u201ca single point of failure, prescribed by the regulators.\u201d <\/p>\n

Therefore, it\u2019s critical that regulators clarify who has the power to use this kill switch. <\/p>\n

Crypto community across the globe reacts<\/h2>\n

The crypto community has already proposed some alternative solutions to bring more legal clarity to smart contracts.<\/p>\n

In April 2023, Polygon had already penned an open letter suggesting how to improve Article 30, sating that lawmakers could apply these rules to enterprises only, excluding software and developers, and make clear that smart contracts aren\u2019t \u201cagreements\u201d in and of themselves.<\/p>\n

More recently, the European Crypto Initiative and numerous organizations, such as Stellar, Iota, Polygon, Near, Coinbase, Cardano and ConsenSys, have signed an open letter voicing their concerns regarding the Data Act and calling on lawmakers to reconsider and clarify certain aspects.<\/p>\n

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We called on lawmakers to reconsider and clarify certain aspects of the #DataAct<\/a> in our Open Letter, written with other 5 organisations and 55 signatories \u2709\ufe0fhttps:\/\/t.co\/37IrdSsFXC<\/p>\n

\u2014 European Crypto Initiative (@EuCInitiative) August 8, 2023<\/a><\/p><\/blockquote>\n

They argued that the Data Act could potentially clash with the recently agreed MiCA regulation. MiCA, which will come into force in 2024, provides a license for crypto exchanges and wallet providers to operate throughout the EU.\u00a0<\/p>\n

They further claim that European lawmakers deliberately sidestepped the more complex issue of decentralized financial regulation \u2013\u2013 an issue the Commission will need to revisit in the coming years.<\/p>\n

More harm than good?<\/h2>\n

The trialogue on the Data Act has been completed, and this means that the text has reached its final version and is likely to be enacted in its current form. <\/p>\n

According to Marke\u017ei\u010d, the new law could affect the European crypto industry and businesses that want to operate in the EU, stating that the Data Act doesn\u2019t give clear details about what use cases the new rules apply to, and that makes the whole industry unsure about what to expect. And this is just the first step in the direction of regulating smart contracts, setting a precedent for forthcoming actions, she said.<\/p>\n

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The next important step for the community is to work closely with European standardization groups. These groups are responsible for creating the standards that vendors and developers of smart contracts should follow when making agreements to share data, especially given that these vendors will need to make sure their smart contracts broadly align with the scope of Article 30.<\/p>\n

According to Voloder, if the Data Act is extended to public networks, it could mean companies leaving the EU, at worst, and \u201cotherwise being pigeonholed into a narrow development trajectory of smart contracts in the best case.\u201d<\/p>\n

\u201cThe result is capital flight, stifled innovation and a floundering blockchain industry in Europe. At a time when Europe is at the vanguard of the regulatory apex, the timing of such an outcome would be most inopportune.\u201d<\/p><\/blockquote>\n