European Union’s Data Act effectively outlaws true smart contracts | Opinion

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Warnings from conspiracy theorists have circulated for a long time about the supposed “internet shut-off button,” expressing concern that any weakness allowing authorities to disable the internet could lead to suppression of information and speech, replaced instead by censorship and control.

In simpler terms, some countries like China, Iran, and Egypt have the ability to shut down their internet completely during times of political unrest. Similar legislation existed in the UK as early as 2003. The EU has now proposed a “kill switch” for cryptocurrencies with the Data Act, which became law on January 11, 2024. This could potentially undermine the fundamental principle of immutability in crypto, where changes to a blockchain’s history cannot be made. However, the industry seemed unprepared as this legislation progressed and was eventually passed into law.

Article 30 of the Act includes a provision that effectively disables smart contracts with a “shut-off” switch. This means that data-sharing agreements executed through automated means can be terminated in response to a security breach, contradicting the inherent immutability of smart contracts. Smart contracts are intentionally devoid of termination or interruption options and cannot be easily upgraded. The passing of the Data Act would significantly impact how smart contracts are utilized within the European Economic Area (EEA).

Blockchain technology keeps a permanent and unchangeable record of every transaction or event that occurs within it. If someone is able to alter, swap out, or fabricate data on the network, they could effectively rewrite history, leading to potentially harmful inaccuracies such as claiming that 1 plus 1 equals 3.

If Article 30 of the Data Act impacts public networks, it would essentially eliminate the European crypto industry as we know it. Decentralized smart contracts, a significant innovation in this field, would be prohibited due to their inherent ability to operate without interruption or termination by entities like intermediaries, public authorities, or courts, who might have the power to control “kill switches.”

In simpler terms, the lack of significant resistance to access control demands in Europe, which clashes with the fundamental principle of openness in public blockchains, raises concerns about the future of cryptocurrencies in Europe.

Parties entering into data-sharing agreements through smart contracts are required to comply with Article 30. However, it’s undecided whether decentralized finance (defi) falls under this category. Also uncertain are the specific conditions for granting “access control” and when the “kill switch” gets activated.

In a continent that was previously hopeful about its cryptocurrency outlook, the future has become uncertain following the enactment of the Markets in Crypto Assets (MiCA) legislation. Instead of thriving capital investments, progress in innovation may come to a standstill, and there might not be a significant European blockchain industry as a result.

Article 30 in its present form could bring significant, unwanted impacts on Europe’s crypto sector and overall global competitiveness. For example, it is essential to clarify the definition of “Smart Contracts” to prevent public blockchains from being excluded from the European market.

Regulators have various options to make Article 30 more rational, including applying it solely to businesses instead of software and coders. Politicians need to reevaluate and provide clearer guidelines for Article 30 or risk driving the whole industry out of the country.

Despite receiving a strong approval with 500 votes in favor and just 23 against, the Data Act is gaining significant traction. However, a small group of crypto companies have voiced their concerns over the bill. Yet, further opposition is required to make a substantial impact.

The European crypto community needs to come together now and urge lawmakers to clarify or amend Article 30 of the Data Act to protect the future of blockchain technology within the EU. This article poses a threat to decentralized finance (DEFi), which operates on public blockchains and smart contracts. The internet serves as our modern record, and smart contracts ensure its security. However, if we allow European authorities to make permanent changes to it, this security could be compromised.

Kadan Stadelmann

Kadan Stadelmann holds the role of chief technology officer at Komodo Platform, where he applies his expertise in blockchain development, operations security, and cryptography. Prior to this position, Kadan gained experience in various sectors including government operations security, technology startup launches, and application development. He began exploring the world of blockchain technology back in 2011 and joined the Komodo team in the year 2016.

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2024-04-20 15:44