EU’s Controversial Smart Contract Kill-Switch Rules Finalized by Negotiators

Legislative negotiators from the European Union have agreed on new rules known as the Data Act – after the Web3 community raised fears that its provisions on smart contracts could kill the sector.

The plans – made as part of a wider overhaul of data rules governing internet-connected appliances – have caused consternation in the Web3 sector for their vague scope and potentially fatal impact on decentralized transactions governed by immutable code.

The deal was confirmed by the European Commission's Thierry Breton in a tweet sent late overnight between Tuesday and Wednesday European time. The legislation is a "milestone in reshaping the digital space" that will lead to a "thriving data economy that is innovative & open — on our conditions," said Breton, who is Commissioner for the EU's internal market.

While no final legal draft of the deal has yet been released, negotiators have told CoinDesk that the text on smart contracts was tightened up from original plans, which are intended to give people more rights over any data produced about them.

“With the adjustments made to the text we are no longer addressing smart contracts in general but make this regulation applicable specifically to the execution of contractual clauses in the context of data sharing,” Damian Boeselager, a lawmaker who led negotiations for the European Parliament’s Green grouping, told CoinDesk.

That suggests some improvements to a proposal the European Commission made in 2022, which said automated programs linked to the exchange of data should include kill switches that allow them to be safely terminated.

But another source briefed on the talks told CoinDesk that the final agreed version of the law still refers to “smart contracts,” rather than alternative formulations proposed by the industry such as “digital contracts.”

The commission has brushed off blockchain industry fears, saying the new law won’t kill off existing smart contracts, and that the high-level requirements it contains shouldn't be problematic for vendors in practice.

But it’s not clear that the final deal will assuage concerns that the measures will prove unworkable for public, permissionless blockchains, where there’s no central actor to implement regulatory strictures.

A recent open letter signed by organizations linked to numerous blockchains, including Stellar, Polygon , NEAR and Cardano, argued the Data Act could conflict with the recently agreed Markets in Crypto Assets (MiCA) regulation.

MiCA, set to take effect in 2024, offers a license to crypto exchanges and wallet providers to operate across the bloc, but policymakers deliberately left out the more complicated topic of how to regulate decentralized finance, which the commission will have to return to in a few years’ time.

For the Data Act to pass into law, the European Parliament and Council, representing the bloc’s 27 member states, must vote in favor of the text agreed by negotiators.