EU Parliament votes for tougher rules on smart contracts

As part of a broad data law, the European Parliament has also moved to introduce new rules for smart contracts.

In the loop of a broad data bill, the European Parliament has also moved to introduce new rules for smart contracts.

'Data Law' to take effect in 2024

On March 14, the European Parliament set new rules and requirements for smart contracts as part of the data law. A provision within it requiring that smart contracts be modifiable has stirred unrest in the crypto space. Is the decentralization of smart contract applications at risk?

Data Law regulates data infrastructure

The bill passed with 500 votes for and 23 against. The law aims to regulate the handling of shared data and create more legal certainty at the EU level. Users must have transparent access to the data they generate. Information generated, for example, by using voice assistants, chatbots, or IoT devices, must be visible to users.

An optimized legal framework for data infrastructure should, alongside user safety, pave the way for future industries and tech applications. The new rules could become mandatory for service providers in Europe starting in 2024. The legislation still needs to go through trilogue negotiations. Accordingly, adjustments may still follow.

Smart contracts with an exit option?

The new requirements for smart contracts also include a "safe termination and interruption". A smart contract must include internal functions to reset a contract or to order it to stop or interrupt the process. A smart contract must define the terms clearly and transparently.

Such emergency mechanisms or "kill switches" are controversial in the crypto space. Critics worry about safety and decentralization of smart contracts, which are validated by the consistent execution of contract terms. In an interview with Cointelegraph, blockchain expert Michael Lewellen explains: "Including a kill switch undermines the guarantees of immutability and introduces a point of failure because someone has to regulate the use of such a kill switch."

Impacts on the DeFi sector hard to gauge

Some voices fear that regulating smart contracts could have a lasting effect on Europe’s DeFi industry. The law also states that smart contracts should provide the same "protection and legal certainty as other contracts concluded by other means". Moreover, smart contracts must be designed to ensure the "protection of the confidentiality of trade secrets". Also, one of the central questions for the planned changes remains unresolved: who will control the kill switches?