Smart contracts in the cryptocurrency industry are getting closer to being regulated across the entire European Union as part of a larger approach to data markets, following the European Parliamentary session.

The European Parliament on Tuesday, 18th of March 2023 approved additional data controls that may call for smart contracts to have information about a kill switch to stop any activity. With 500 votes in favour and 23 votes against, the European Parliament passed the Data Act legislation on Tuesday. 

The legislation, including its smart contract provisions, does not specifically target the cryptocurrency sector; instead, it focuses on data from linked devices or the Internet of Things. But, others in the sector are concerned that if the scope of the Data Act isn’t clearly defined, it may have significant consequences on cryptocurrency, particularly given that the DeFi infrastructure is supported by smart contracts, which are automatic executions built into the software.

Leading legislator Pilar del Castillo Vera stated during the bill’s debate that the new regulations will empower consumers and businesses by allowing them to decide what can be done with the data collected by linked items. One of the legislators who has thrown her weight into the bill, Pilar del Castillo Vera, said during the bill’s debate that the new regulations will empower customers and businesses by allowing them to decide what can be done with the data collected by connected gadgets. 

One of the issues raised in the provision according to Vera’s revised bill is that smart contracts must have access limits and must protect trade secrets. Experts are concerned that adding functions to stop or reset them could defeat their intended purpose.

Legislation on Smart Contracts 

The Data Act’s Article 30 outlines the “basic standards underlying smart contracts for data sharing.” Included in the design of smart contracts are “rigorous access control methods” and trade secret protection. The ability to halt or pause transaction processes would be necessary, and lawmakers would need to determine under what circumstances such a possibility would be allowed.

In earlier versions of the bill, developers of smart contracts would be required to go through time-consuming compliance procedures, such as filing an EU declaration of conformity. As seen in recent revisions, these clauses have been removed. 

Response from the blockchain populace 

The smart contract provisions don’t seem to be overly restrictive for the sector, according to Natalie Linhart, legal counsel of blockchain software company ConsenSys. According to her, Article 30 is considered to be a minor rule that only applies to smart contracts used in IoT apps that facilitate data transfers, not to smart contracts used in DeFi applications.  

In upcoming legislative measures on cryptocurrency, Linhart advises that “standards aren’t extended to other smart contracts,” she told The Block in an email. The EU would become an unattractive location for software engineers if there were “substantive regulations for blockchain development,” she continued.

Conversely, majority of smart contracts that exist today, compliance with this clause would be extremely difficult, if not impossible, according to Marina Markezic, head of EUCI. 

Markezic claimed that the proposed regulations are incompatible with smart contracts as smart contracts are currently understood and could lead to the creation of new technology. 

Also reacting to this bill, Thibault Schrepel, an associate professor at VU Amsterdam revealed on Twitter that Article 30, as currently drafted, goes a step too far in addressing the issues raised by immutability,” adding that the move endangers smart contracts to an unpredictable extent. He is strongly of the opinion that the legal text interferes with the fundamental concept that automated systems cannot be changed by anyone because it is unclear who in actuality would have to press the kill button on a smart contract.

With this vote, del Castillo Vera and other parliamentarians will have the authority to negotiate a final version of the bill with the governments of EU member states.

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