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EU Parliament approves the Data Act, which requires "kill switches" for smart contracts

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(Kitco News) - Under new rules adopted by the European Parliament, smart contract developers may be required to implement “kill switches” in their contracts that would allow a reset of activity.

On Tuesday, the European Parliament voted in favor of the Data Act by a wide margin, with 500 votes in favor of the legislation versus 23 against it. While the legislation wasn’t specifically crafted to target the crypto industry, its provision on smart contracts focuses on data from connected devices, also known as the Internet of Things (IoT).

While the measure is intended to give people more control over information from smart devices, it is also generating concerns in the Web3 community over fears that it will be used to target certain types of transactions.

According to Pilar del Castillo Vera, a centrist-right MEP and rapporteur on the Data Act, the legislation has the potential to “contribute to optimizing existing business models and processes, boost the development of new ones, and by doing so creating new values and jobs.” Castillo Vera made the comments while opening Tuesday’s plenary in the European Parliament in Strasbourg.

“The new rules will empower consumers and companies by giving them a say on what can be done with the data generated by the connected products,” Castillo Vera said during a debate.

Based on the text of the legislation, smart contracts fall under Article 30 of the Data Act, which relates to “essential requirements regarding smart contracts for data sharing.”

The provision that is worrying crypto proponents is the “rigorous access control mechanisms” and protection of trade secrets integrated into the design of smart contracts. The legislation is looking to require a mechanism that could terminate or interrupt transactions, and it will be up to lawmakers to decide which conditions would make it permissible.

Experts worry that including such functionality – the ability to stop or reset a smart contract – could undermine their purpose.

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“The immutability of smart contracts is key to their survival (i.e., immutability is their main differentiating feature),” Thibault Schrepel, an Associate Professor at VU Amsterdam University, tweeted ahead of the vote. “Article 30, as currently drafted, goes a step too far in addressing the issues raised by immutability. Instead of enacting "practical immutability" (where immutability remains the principle and alterability the exception), it makes alterability the principle. In doing so, it endangers smart contracts to an extent that no one can predict.”

According to Schrepel, who is a specialist in blockchain legal issues, the legal text is unclear as to who would be responsible for triggering the kill switch on a smart contract, which interferes with the fundamental principle that the automated programs can’t be altered by anyone.

“As currently drafted, Article 30 does not provide clarity as to who should be able to ‘terminate the continued execution of transactions,’” Schrepel wrote. “Is it the creator of the smart contract? Public authorities? Courts? If the EP wishes to proceed with Article 30, future versions should at least make it clear that only the creator of a smart contract can terminate it.”

The Data Act will now move on to trialogue negotiations where each EU institution will defend its position and lawmakers will work with national governments to settle on a final version of the law.

According to a tweet from the developers at Curve Finance, a decentralized stablecoin liquidity protocol, it is “impossible to comply” with the stipulations outlined in the proposal.

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