EU passes smart contract regulation: what does that mean?

smart contract

The European Union (EU) adopts the regulation of smart contract under the Data Act . What does this mean for the crypto industry? Are the policy requirements realistic at all?

EU passes regulation of smart contract

Yesterday, the European Parliament passed the Data Act, which deals with smart contracts, among other things. 500 MPs voted in favor of the proposal, while 110 people abstained and 23 politicians voted against the draft.

The law mainly deals with the use of user data, its accessibility for the users themselves and the security of the data collected. In the course of this, the legislature made it its task to also apply regulations to smart contracts.

According to Article 30 of the Data Act , this affects smart contracts used to provide data. However, it remains questionable which types of smart contracts are affected by this provision.

Smart contracts usually always use data to be executed automatically. The European Union is probably addressing smart contracts with the regulation, which could be used to share data or statistics.

What does the Data Act mean for smart contracts?

According to the legislator, smart contracts that fall under the regulation of the Data Act must be so robust that they function without errors and cannot be manipulated by attackers.

They must also be able to determine who has access to which data. These specifications are intended to enforce the security of smart contracts. However, it remains doubtful whether there will be any change as a result. Developers typically do not make smart contracts intentionally unstable.

However, Paragraph B of Article 30 is much more critical. In it, the EU calls for “safe termination and interruption”. It must therefore be possible to safely interrupt and terminate smart contracts. The creator of the smart contract bears the legal responsibility for this.

You must ensure that a mechanism is in place to stop the continued execution of transactions: the smart contract must contain internal functions that can reset or instruct it to stop or pause the operation to avoid future (accidental) executions .

With this requirement, the EU apparently wants to ensure that a smart contract can be switched off in an emergency to prevent further damage. However, this requirement is deeply contrary to the basic principles of smart contracts.

The basic principle of smart contracts is to be neutral and immutable. The smart contract always runs according to defined rules that are derived from the program code and treat every user equally. The Data Act would destroy that neutrality.

At the same time, creators must inform their users of the circumstances under which an interruption might occur.

It is very unlikely that the Data Act will have any real impact on the crypto industry or the DeFi sector. The experience of the last few months shows that legal requirements are ineffective compared to Smart Contracts .

Does the EU require confidential smart contracts?

The law also creates other ambiguities. So the paragraph BB calls for the

Protection of trade secret confidentiality: It must be ensured that a smart contract has been designed in such a way that trade secret confidentiality is guaranteed and takes place in accordance with this regulation.

Most smart contract platforms use transparent blockchains. The wording of the paragraph suggests that the EU is demanding confidential smart contracts. In fact, this topic has recently gained importance in the crypto scene.

For example, Ethereum co-founder Vitalik Buterin called for stealth addresses . Various scaling solutions work on confidential smart contracts. Such a project is also being created on Cardano , which is even being designed by the Cardano developers themselves.

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