Blockchain devs expect complications from EU smart contract kill switch

The Data Law, a controversial piece of European Union legislation that includes a clause requiring the ability to terminate smart contracts, has been approved by the European Parliament. If introduced, the legislation will require a smart contract to have a "kill switch".

In a press release on November 9, parliament announced that the legislation was approved with 481 votes in favor and 31 against. The next step for it to become law is to obtain approval from the European Council.

In its current form, the Data Law stipulates that smart contracts must have the ability to be "interrupted and terminated" and requires controls that allow the contract to be reinstated or stopped. The stipulation appears to be a significant departure from the fundamental decentralization spirit of blockchain.

It is not yet clear how such switches would be implemented and how they could affect the development and use of smart contracts. Scott McKinney and Laura De Boel, attorneys at Wilson Sonsini Goodrich & Rosati, told Cointelegraph that such a switch is “fundamentally incompatible with what a smart contract is” and what it looks like.

They added that the definition of a smart contract included in the Data Law is "too broad" and likely covers computer programs that would not currently be considered a smart contract. They added:

“However, it is important to understand that the smart contract requirements of the EU Data Law will likely only apply to a relatively small subset of smart contracts (or potential smart contracts), i.e. smart contracts to execute 'data agreements'. data exchange' governed by the Data Law. Act."

Taking into account EU requirements, including the kill switch and data archiving obligations, they suggested that many companies that enter into enforceable data sharing agreements "will simply decide not to use smart contracts in their applications."

Gracy Chen, CEO of cryptocurrency exchange Bitget, told Cointelegraph that implementing a kill switch “introduces a centralized element” that can “erode trust in smart contracts as users may be wary of trusting contracts.” that external entities could potentially modify." or close.”

As the EU moves closer to signing a smart contract kill switch into law, it is unclear how it would enforce its application.

Enforce a “kill switch”

According to Wirex co-founder and CEO Pavel Matveev, implementing and regulating such a mechanism would allow smart contract implementers to “self-assess compliance with essential requirements and issue an EU declaration of conformity.”

Matveev told Coinelegraph that the Data Law's definition of smart contracts is "broad and lacks precision regarding the circumstances under which interruptions or terminations must be initiated."

McKinney and De Boel believe that the regulation could hinder blockchain innovation in the EU, as its requirements are "quite strict and providers will have to go through potentially onerous conformity assessments."

Recent: Milei's presidential victory fuels optimism in Argentina's Bitcoin community

However, it's not all negative, as the lawyers noted, the Data Law states "that European standardization organizations will be asked to develop harmonized standards for smart contracts." They added:

“Further standardization could strengthen the use of blockchain in the EU and could even lead to greater adoption of smart contracts outside the data access agreements regulated by the Data Law.”

Arina Dudko, head of corporate payment solutions for cryptocurrency exchange Cex.io, told Cointelegraph that as regulatory oversight of cryptocurrency companies increases, many have "decided on a system of transparency and detailed reporting." That system has allowed them to adhere to the applicable directives.

Dudko further compared the development of rules around blockchain technology to safety rules and standards for automobiles. When cars first hit the roads, seat belts were not mandatory, safety standards varied wildly, and when regulations were finally introduced, "some vehemently fought progress in safety standards before they became into accepted practice.

Over time, he said, regulations surrounding these safety standards saved lives and led to safer roads. He compared these developments to the EU Data Law and said he has faced a “similar phase of reactionary backlash.”

Dudko said that, like “emergency exits and fire codes, these accommodations are critical to ensuring the environments and products we share are safe for everyone.” Crypto market participants, he said, need a way to escape if they "get caught in a nefarious or misguided compromise."

"While this could discourage die-hards from using these resources, introducing basic protections for users could serve to welcome skeptics and crypto-curious participants to make their first transaction."

Impact on blockchain adoption

Debate over how the EU Data Law will affect the industry is ongoing, with some suggesting it could lead to a setback or even hinder its adoption.

Several provisions could hinder the adoption of smart contracts in Europe, including geofencing services to maintain regulatory compliance.

According to Dudko, there is an "unfortunate aversion to regulation in some branches of the crypto ecosystem that goes against the founding principles of the industry," but for her, regulation is only an obstacle for those "with limited vision."

Dudko argued that Bitcoin (btc) the genesis block's reference to the 2008 financial crisis was an “explicit mention” of the “pale response” to the crisis, which was itself “a product of lax supervision.” She added:

“Retail customers want less risk in their transactions, and policymakers are right to seek the ability to opt out if an opportunity turns out to be too good to be true. The challenge for developers now is to work within these limits and continue to focus on user satisfaction.”

Chen said the kill switch could “impose additional compliance requirements on developers,” which could lead to delays and higher costs when implementing smart contracts.

Furthermore, the effectiveness and functionality of these smart contracts could be affected due to strict data obligations. Chen added: "The applicability of smart contracts largely depends on their autonomous and self-executing nature, and any third-party intervention or interference poses a risk to their integrity."

Do not make the enemy of good perfect.

While the new EU regulatory landscape poses some significant challenges for companies employing smart contracts, it provides an imperfect but visible set of rules that is not present in many jurisdictions.

In the United States, regulators have been accused of regulation by law enforcement after suing several crypto exchanges including Coinbase, Kraken, and Binance. To this day, the very definition of cryptocurrency differs between different US financial surveillance agencies.

Chen said the EU is “generally more cautious and more regulatory-focused” than other major economies, while McKinney and De Boel said Europe “is typically at the forefront when it comes to regulating data-driven industries.”

”The Data Law, as part of this digital strategy, establishes harmonized rules for data sharing agreements. “It is the first major regulation of its kind that has such specific requirements and implications for smart contracts.”

By contrast, they said the United States has no federal smart contract law and has “relatively few state smart contract laws, most of which simply clarify that a smart contract can be a valid and binding contract. “

Recent: Bitcoin Supercycle 2024: Is this the cycle that will end them all?

Dudko said the EU has led with "common sense regulations that speak to the public's broad understanding and use of digital currencies," adding that "the US and UK put" greater emphasis on asset classification. and promotional messages, respectively", while the EU is "Continue to establish standards around project procedures and functionality."

While the Data Law is moving forward, it has not yet been passed, meaning the blockchain industry still has time to prepare. The industry will only know the true scope of the law once it has come into force.