Data Act, a contentious piece of European legislation requiring smart contracts to be able to be terminated – has been approved by the European Parliament. The legislation will require a “kill switch” for smart contracts if it is introduced.

The parliament announced on Nov. 9 that the legislation had passed with 481 votes in favor and 31 against. The European Council must approve it before it becomes law.

As part of the Data Act, smart contracts must be able to be “interrupted and terminated,” and controls must be in place to allow the contract to be reset or halted. Decentralization, the blockchain’s foundational ethos, appears to be significantly displaced by the stipulation.

In terms of how such kill switches would be implemented, and how they might affect smart contract development, it is unclear. As attorneys with Wilson Sonsini Goodrich & Rosati pointed out, such a kill switch is fundamentally incompatible with what smart contracts are and how they are viewed, according to Scott McKinney and Laura De Boel.

The definition of a smart contract included in the Data Act is “overbroad” and likely to include computer programs that are not currently considered smart contracts.

“However, it’s important to understand that the EU Data Act’s smart contract requirements will likely only apply to a relatively small subset of smart contracts (or potential smart contracts), i.e., smart contracts for executing of ‘data sharing agreements’ governed by the Data Act.“

According to Gracy Chen, managing director at Bitget, the EU’s requirements, which include a kill switch and data archiving obligations, may discourage companies from using smart contracts in their applications. Chen also noted that the implementation of a kill switch could introduce centralized control and erode trust in smart contracts. It remains unclear how the EU would enforce the use of a kill switch if it becomes law. Enforcing a “kill switch”

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

Matveev told Coinelegraph that the Data Act’s definition of smart contracts is “expansive and lacks precision regarding the circumstances under which interruptions or terminations should be initiated.”

According to McKinney and De Boel, the regulation may stifle blockchain innovation in the EU because its requirements are “quite strict, and vendors will have to undergo potentially burdensome conformity assessments.”

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Attorneys noted, however, that the Data Act requires European standardization organizations to develop harmonized smart contract standards.

“Increased standardization could strengthen the use of blockchain in the EU, and could even lead to greater adoption of smart contracts outside of the data access agreements that are regulated by the Data Act.”

According to Arina Dudko, head of corporate payment solutions at Cex.io, crypto companies are “settling on a system of transparency and detailed reporting” as regulatory oversight builds. That system has allowed them to comply with relevant directives.

A number of safety and standards rules were developed around blockchain technology, according to Dudko. As cars first entered the road, seatbelts were not mandatory, safety standards varied widely, and when regulations were finally introduced, “some vehemently opposed progress in safety standards before they became accepted practice.”

In time, these safety standards saved lives and made roads safer. She likened this to the EU’s Data Act, which has been facing “similar reactionary blowback.”

In the same way that emergency exits and fire codes are important for the safety of all, Dudko explained that crypto market participants need a way out if they “get locked into a nefarious or misguided commitment.”

“While this could discourage hardliners from engaging with these resources, introducing basic user protections could serve to welcome skeptics and crypto-curious participants to make their first transaction.”

Impact on blockchain adoption

The debate on how the EU’s Data Act will impact the industry is ongoing, with some suggesting it could lead to a retreat or even hinder adoption. For example, geofencing services could hinder smart contract adoption in Europe.

According to Dudko, there’s an “unfortunate aversion to regulation in some offshoots of the crypto ecosystem that runs antithetical to the industry’s founding principles,” but to her, regulation is only a hindrance to those “with limited vision.”

According to Dudko, the Bitcoin Genesis Block references the 2008 financial crisis as an “explicit mention” of the “pallid response” to the crisis.

“Retail customers want less risk in their transactions, and legislators are right to seek the ability to pull the plug if an opportunity proves too good to be true. The challenge for developers now is to work within these confines and still stick the landing on user satisfaction.”

A kill switch could increase compliance requirements for developers, causing delays and increased costs when deploying smart contracts, Chen said. In addition, strict data obligations could adversely affect the effectiveness and functionality of these smart contracts. The enforceability of smart contracts is heavily influenced by their autonomy and self-executing nature, and any third-party interference poses a threat to their integrity, Chen added.

Don’t make perfect the enemy of good

Although the EU’s new regulatory landscape presents some significant challenges for businesses using smart contracts, it provides an imperfect but visible set of rules that aren’t present in many other countries.

Since using cryptocurrency exchanges like Coinbase, Kraken, and Binance, U.S. regulators have been accused of regulation by enforcement. To this day, different U.S. financial watchdogs define cryptocurrency differently.

McKinney and De Boel said Europe is “typically at the forefront when it comes to regulating data-driven industries,” whereas Chen said the EU is generally “more cautious and regulation-focused.”

”The Data Act, as part of this digital strategy, sets harmonized rules for data sharing arrangements. It is the first major regulation of this kind having such specific requirements and implications for smart contracts.”

They said that the U.S. has no federal smart contract law and has “relatively few state laws regarding smart contracts, most of which simply clarify that a smart contract can be a valid, binding contract.”

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According to Dudko, the EU has implemented practical regulations that reflect the public’s widespread familiarity with and use of digital currencies. In contrast, the US and UK prioritize asset classification and promotional messaging respectively, while the EU focuses on establishing guidelines for processes and project effectiveness. Although the Data Act is making progress, it has not been officially enacted yet, giving the blockchain industry an opportunity to get ready. Only when the law is in effect will the industry fully comprehend its extent.

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