EU Data Act draft contains controversial smart contract kill switch.

EU Data Act draft contains controversial smart contract kill switch.

The Blockchain Industry and the European Union Data Act

The blockchain industry has expressed concerns over the final version of the new European Union Data Act rules, as it could potentially make most smart contracts unlawful. The text of the law, seen by CoinDesk, reveals that provisions intended to ensure the safe termination of automated data-sharing agreements still broadly refer to “smart contracts.” This has raised concerns among blockchain lobbyists, as they had hoped the law would specifically address privately owned and permissioned data records. The text also places duties on the “vendors” of automated programs, which has alarmed lobbyists who fear it could impose a “perpetual and limitless responsibility” in decentralized cases where there is no single seller.

The text of the law, obtained under EU freedom of information laws, still refers to “smart contracts” rather than the industry’s preferred term of “digital contracts.” It has undergone changes from the European Commission’s original proposals in February 2022 to clarify that the rules apply only when programs are used for the automated execution of data-sharing agreements, particularly in relation to smart devices such as connected cars and fridges. However, the scope of the law still appears to be wider than what the blockchain industry had requested, as it does not explicitly refer to private or permissioned networks.

The text, which was circulated privately to the member governments of the European Union by Spain, the current chair of the talks, represents an update according to the provisional political agreement reached during a June 27 meeting. This agreement, reached in talks with lawmakers at the European Parliament, is said to have successfully closed the negotiations. To become law, the text must be formally agreed upon by the parliament and the governments in the Council of the EU.

In an open letter signed by organizations associated with various blockchains, including Stellar, Polygon, NEAR, and Cardano, concerns were raised that the proposed rules could prove unworkable and undermine the purpose of permissionless networks where no single entity is in charge. The European Commission has denied that the new rules would make existing contracts illegal.

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This development highlights the ongoing tension between blockchain technology and regulatory frameworks. The blockchain industry has been advocating for a more nuanced and tailored approach to regulations that consider the unique characteristics and potential of blockchain technology. The term “smart contracts” itself is a testament to the transformative power of blockchain technology, as it refers to self-executing contracts with the terms of the agreement directly written into lines of code. These contracts can be verified, executed, and enforced without the need for intermediaries, providing increased efficiency, transparency, and security.

However, the nature of blockchain technology also presents challenges when it comes to traditional regulatory frameworks. The decentralized and distributed nature of blockchain networks, coupled with the pseudonymous identities of participants, can make it difficult for regulators to enforce compliance and ensure accountability. This has led to debates on how to strike a balance between enabling innovation and safeguarding against potential risks.

The concerns raised by the blockchain industry regarding the European Union Data Act reflect the need for regulations to evolve alongside technological advancements. It is crucial for lawmakers and regulators to engage with industry stakeholders, understand the intricacies of blockchain technology, and consider the potential implications of their decisions on the industry as a whole. A collaborative approach that fosters dialogue and learning between regulators and the blockchain industry is essential to develop effective and balanced regulations.

To better understand the concerns raised by the blockchain industry, it is worth examining the distinction between “smart contracts” and “digital contracts.” While the terms are often used interchangeably, they differ in their underlying technology and legal implications. “Smart contracts” refer specifically to contracts that are coded on a blockchain platform and can automatically execute predetermined actions when certain conditions are met. On the other hand, “digital contracts” encompass a broader range of contracts that are created and stored digitally, regardless of whether they are executed through blockchain technology or traditional means.

By using the term “smart contracts” in the European Union Data Act, the legislation potentially encompasses a wide range of automated data-sharing agreements, including those that may not involve blockchain technology. This lack of specificity could have unintended consequences for the blockchain industry, making it difficult for companies to navigate the regulatory landscape and potentially stifling innovation.

The duties placed on the “vendors” of automated programs, as outlined in the text of the law, also raise concerns. In decentralized blockchain networks, there is typically no single vendor or central authority that can be held responsible for the operation of the network. Imposing perpetual and limitless responsibilities on vendors could undermine the decentralized nature of blockchain networks and discourage participation.

To address these concerns and ensure the development of regulations that are conducive to innovation and growth in the blockchain industry, it is essential for policymakers and regulators to engage in open dialogue with industry stakeholders. This dialogue should focus on understanding the unique characteristics of blockchain technology, its potential benefits, and the challenges it presents to traditional regulatory frameworks.

In conclusion, the blockchain industry has expressed concerns over the final version of the European Union Data Act rules, which could potentially make most smart contracts unlawful. The use of the term “smart contracts” instead of “digital contracts” and the imposition of duties on vendors of automated programs have raised concerns within the industry. To foster a regulatory environment that supports innovation and growth in the blockchain industry, policymakers and regulators must engage in open dialogue with industry stakeholders and consider the unique characteristics of blockchain technology. By doing so, they can develop regulations that strike a balance between enabling innovation and safeguarding against potential risks.