EU Adopts Data Act with Provisions for Smart Contracts

• Financial

The European Parliament has taken a step closer to implementing smart contract regulations as part of a broader market data strategy. The Data Act, which contains provisions to protect trade secrets and avoid unlawful data transfers, received 500 votes to 23 in favor.

The new law will have an impact on smart contracts, especially those supporting DeFi infrastructure, causing concern within the crypto industry.

The Scope of the Data Act

The Data Act primarily targets data from connected devices on the internet, rather than the crypto industry.

However, the scope of the Act is not clearly defined, which could result in broader application in the crypto industry, particularly in relation to smart contracts, automatic execution written in software. According to the Data Act, smart contracts must include internal functions that can reset or instruct the contract to stop or interrupt the operation.

These requirements are aimed at providing safe termination and interruption. In addition, rigorous access control mechanisms must be built into the design of smart contracts to protect trade secrets.

Today, the @Europarl_EN is debating the Data Act (https://t.co/cwDOFDGmU9).

My thoughts on the latest version of Article 30 (#smartcontracts).
➝ The immutability of smart contracts is key to their survival (i.e., immutability is their main differentiating https://t.co/X3XfgRC6ZL… https://t.co/4JHg2fP84j pic.twitter.com/8QTSBxSueH — Thibault Schrepel (@ProfSchrepel) March 14, 2023

The Impact on Smart Contract Developers

Smart contract developers will be required to ensure compliance with regulations, such as the European Declaration of Conformity.

These provisions will require additional processes to ensure compliance with the regulations, which some developers may find challenging. Michael Lewellen, OpenZeppelin's head of solutions architecture, identified issues with the legislation, stating that "including a kill switch undermines immutability guarantees and introduces a point of failure since someone needs to govern the use of such a kill switch.

Many smart contracts such as Uniswap do not have this kill switch ability."

Negotiating the Final Form of the Law

The Data Act was passed by a margin of 500-23, with 110 abstentions. Parliament members will now negotiate the final form of the law with the European Council and individual member countries of the European Union.

The Data Act marks a significant step towards implementing regulations for smart contracts in the EU. The impact of these regulations on the crypto industry, particularly DeFi infrastructure, remains to be seen. However, it is clear that smart contract developers will face additional processes to ensure compliance with the new regulations.

As negotiations continue, it is important to strike a balance between protecting trade secrets and avoiding the introduction of potential points of failure.