- The EU Data Act introduces new rules and requirements for smart contracts, raising concerns about their decentralization and hindering their development.
- Blockchain associations and projects like IOTA are urging European lawmakers to address the potential negative impact on smart contracts.
The European Parliament’s “Data Act,” which was passed in March, has raised concerns about the future of smart contracts and their decentralization. Article 30 of the act, as currently formulated, could significantly restrict the current use of smart contracts, particularly on public blockchains, impeding their further development and utilization. Is this a de facto ban on decentralized applications and smart contracts?
Yesterday, the Council Working Party discussed the #EUDataAct, shaping the future of #Blockchain & #SmartContracts. Let's unite as an industry to influence critical terminology changes.🔔Join https://t.co/f3F4rRwp0Q @EuCInitiative @BlockchainforEU @EUBLASORG @DigitalDcgg @Iota
— INATBA (@INATBA_org) June 20, 2023
Crypto enthusiasts are expressing worries about the decentralization of decentralized finance (DeFi) applications. However, there is hope as several blockchain associations and projects, including the Internet of Things (IoT) project IOTA, have joined forces to address the European lawmakers.
The Data Act Aims to Ensure Technological Progress The enacted law aims to regulate the handling of shared data and provide legal certainty at the EU level. Users should have transparent access to the data they generate, such as information generated through the use of voice assistants, chatbots, or IoT devices.
In addition to user security, the optimized legal framework is intended to pave the way for future industries and tech applications. The new rules could become binding for service providers in Europe from 2024 onwards. Currently, the Data Act is still in the trilogue process, a procedure to reach an agreement between the EU’s three main institutions. Adjustments may still be made, and prominent figures in the crypto industry, including Binance, Kraken, Ripple, and Coinbase, have all signed a letter to the lawmakers.
Unclear Definitions in the Data Act Regarding Smart Contracts As described in the letter, the legal distinction between smart contracts and traditional legal contracts in the Data Act is imprecise. This lack of clarity could lead to unnecessary complexity and confusion in the interpretation and application of the regulation. The problem lies in the misinterpretation of the differences between private and public networks. The Data Act was primarily written with private networks in mind, as indicated by the provisions of the draft law.
The current wording of the Data Act creates uncertainty about the legality of numerous existing smart contracts. Startups and SMEs that rely on this technology are placed in a precarious situation. Business operations are disrupted, and business models are jeopardized, resulting in negative economic consequences. If smart contracts using public blockchains are deemed illegal due to an overly broad interpretation of the Data Act, significant negative consequences could arise for these companies.
Once again, similar to the challenges posed by the MiCA regulation, the crypto sector faces a significant hurdle. The issues raised by the EU Data Act could potentially have a lasting impact on the use of smart contracts in the European economic zone, and not for the better.
Potential Effects on Ethereum and Other Protocols The introduction of the EU Data Act could require significant adjustments to public protocols. One possible change would be the legally mandated implementation of compliance measures. Public platforms would need to introduce mechanisms to ensure compliance with the new legal requirements, including the implementation of the aforementioned “kill switches” and control mechanisms.
Furthermore, protocols like Ethereum or Cardano may be compelled to
“develop or support more advanced verification and auditing systems for smart contracts to demonstrate compliance with the law,”
as stated by Dominik Schiener, co-founder and chairman of IOTA. The introduction of such control mechanisms, however, would contradict the essence of most crypto protocols, which rely on decentralization. Dominik Schiener shares a similar view:
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“The introduction of a kill switch through the law challenges the blockchain principle of immutability. Protocols would be faced with the challenge of implementing such a feature without compromising the security and trustworthiness of the blockchain. […] In extreme cases, some protocols may need to reconsider their consensus mechanisms or other core functionalities to meet the new requirements.”
One of the crucial questions regarding the proposed changes remains unanswered: Who will have control over the kill switches? The uncertainty surrounding the control of smart contracts poses risks not only to the protocols themselves but also to the service providers built on top of them.
A Crypto Exodus from Europe?
“The consequence would be a talent and investment outflow from the European industry to jurisdictions with more tailored regulations,”
explains Dominik Schiener, co-founder of IOTA. Moreover, digital progress could be stifled, and governments would suffer financial losses due to the decline in the industry.
Additionally, the ambiguous wording of the Data Act could suppress innovation, which would have long-term implications, including for consumers. Schiener emphasizes:
“The broad interpretation of ‘smart contracts’ could also affect smart contracts that enable the exchange of digital assets. This would create compliance challenges that may conflict with other regulations.”
One such regulation is the MiCA framework, which aims to protect consumers and attract crypto companies to Europe. The imprecise definition of smart contracts in the Data Act undermines the efforts of European lawmakers themselves. What is needed now is a compromise.
Are Lawmakers Ready for a Compromise? In their letter, IOTA and the blockchain associations propose three solutions to address the controversial passage in the EU Data Act. The goal is to improve legal clarity, maintain the principle of technological neutrality, and promote growth and innovation in the digital market within the EU.
On inquiry, Dominik Schiener explains the current prospects. While the blockchain industry has continuously attempted to influence the Data Act, the proposed changes have not yet been included in the regulators’ drafts. He further states:
“Now, facing this ongoing issue and the imminent conclusion of the negotiations, the industry has consolidated its efforts, calling once again collectively and with a stronger voice for this change. This joint initiative symbolizes the commitment and desire of the industry to achieve legal clarity in this legislative proposal.”
However, as Schiener explains, there is still time. The ball is now in the lawmakers’ court. The blockchain associations are optimistic that the political decision-makers will consider the concerns raised and work towards a compromise. The outcome of these negotiations will have a significant impact on the future of smart contracts and the decentralization of blockchain technology in Europe and beyond.
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