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

The recent European Council and Parliament consensus on the Data Act highlights potential challenges and considerations for crypto in the EU.

On June 28, a agreement An agreement was reached between the European Council and Parliament on the Data Act, promoting legislation on non-personal data. The law aims to extend the provisions of the Data Governance Act 2020, which stems from the European Strategy for Data. Before it becomes enforceable, it needs the approval of the European Parliament and the Council, which speaks on behalf of the EU’s 27 member states.

The upcoming Data Act has special significance for the crypto domain. At the center of the debates is the introduction of a ‘kill switch’, a feature designed to terminate or suspend automatic data sharing agreements in the event of security issues.

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

Marina Markežič from the European Crypto Initiative highlighted the law’s lack of specificity regarding the conditions for activating the ‘kill switch’. Given the inherent immutability of blockchain, implementing such a feature comes with inherent challenges. The law’s vagueness about what constitutes a “data sharing agreement” further adds to the uncertainties.

There are also questions about how the law could affect decentralized finance (defi). So far, the European Union has no defined regulations for defi, making the implications of the law in this area somewhat vague.

Erwin Voloder, affiliated with the European Blockchain Association, highlighted potential hurdles, especially if public networks fall under the purview of the law. Such an inclusion could have consequences for business operations within the EU.

Several global crypto entities, including household names such as Polygon and Stellar, have expressed their reservations and emphasized the need for clearer distinctions in the law. There are broader concerns about how the law could intersect with the MiCA regulation, scheduled for implementation in 2024.

In its current form, the Data Act underlines the need for clarification of regulations in the field of crypto. However, it raises more questions than answers, indicating a clear need for dialogue and cooperation between industry stakeholders and European regulators.