Smart contracts might be stifled by EU Data Act

The EU has published its new Data Act, a law proposal that aims to regulate the generation and handling of data by the actors that harness it. The act, in its large scope, touches on the subject of smart contracts and proposes that every smart contract should have a termination function to stop the flow of transactions when required.

The newly proposed EU Data Act, published on February 23, aims to regulate and control the ways in which data is being generated, bringing legal clarity to the data market in Europe. According to a press release, the new Data act seeks to “ensure fairness in the digital environment, stimulate a competitive data market, open opportunities for data-driven innovation and make data more accessible for all.”

However, due to its large scope, this new act touches the subject of smart contracts, which are pieces of software designed to execute certain tasks based on data inputs. The document, in its article 30, titled “essential requirements regarding smart contracts for data sharing,” defines the requirements that smart contracts must fulfill to be deployed in conformity with EU laws.

One of these requirements, called “safe termination and interruption,” states that approved smart contracts shall: “…include internal functions which can reset or instruct the contract to stop or interrupt the operation to avoid future (accidental) executions.”

Another requirement for smart contracts to be validated by the EU includes the ability to audit the contracts, with the possibility of obtaining a record of the transactions made in the past by the software.

The proposal of interruptible smart contracts and the standardization of these smart contracts to the new requirements imposed by the Data Act were received negatively by some analysts, who criticized the scope and the applicability of the document.

“Now, this is absolutely huge/controversial. It imposes smart contracts (that make data available) to be stoppable. So… basically, all oracles *shall* be redesigned (but how?), or else they will infringe the law,” stated Thibault Schrepel, Associate Professor of Law at VU Amsterdam.

Schrepel further stated that the approval of this act would make millions of online smart contracts illegal in the proposed jurisdiction, with no way of adapting them to the requirements presented in the document.

The EU has had its sights on cryptocurrencies recently, with some of its countries lobbying for the creation of a crypto AML watchdog in the region, according to reports.

Recently, EU Commissioner for Home Affairs said that the EU is open to digital assets but with fraud-preventing regulation. The commissioner spoke at the Munich Security Conference 2022 on February 18, attended by the CEO of FTX, Sam Bankman-Fried, and Christian Angermayer, cofounder of the Crypto Asset Group.