On June 28, the European Council and Parliament achieved a political consensus on the Data Act, which moves the legislation regarding non-personal data closer to fruition.
Thierry Breton, European Union commissioner for the internal market, described the agreement in an X post as a “milestone in the reshaping the digital space.”
Another deal! ⁰Tonight’s agreement on the #DataAct is a milestone in reshaping the digital space.
Thanks to the swift work of the EP @delcastillop & the Council Presidency, we are on the way of a thriving data economy that is innovative & open — on our conditions. pic.twitter.com/vTWUU8xTx9
The Data Act complements the Data Governance Act of November 2020 by clarifying who can create value from data and under which conditions. It stems from the European Strategy for Data, announced in February 2020, which also aims to position the EU as a regulatory frontrunner in the era of data-driven society.
The Data Act is part of the European Commission’s wider data strategy aimed at making Europe a global leader in the data-agile economy. In simple terms, the Data Act proposes new rules on who can access and use data generated in the EU across all economic sectors.
For the Data Act to become law, it must be approved by a vote of the European Parliament and the Council, which represent the bloc’s 27 member states. And once again, as with the Markets in Crypto-Assets (MiCA) regulation, the crypto sector is facing a major challenge. The problem raised by the new EU data law could permanently change the use of smart contracts in the European Economic Area (EEA) –– and not for the better.
Smart contract “kill switch”
The blockchain community is largely concerned about one provision in the Data Act, namely that automated data-sharing agreements contain a “kill switch” by which they could be terminated or halted in the event of a security breach.
Many blockchain experts contend that the current definition of smart contracts in the Data Act is broad, fearing it may lead to unintended consequences for existing smart contracts on public blockchains. For example, the text of the upcoming law doesn’t distinguish between just digital contracts and smart contracts utilizing distributed ledger technology.
But above all, the Data Act supposedly doesn’t give clear details about the conditions under which safe termination or interruption kill switch should occur, and it is hard to predict the potential outcomes with a higher degree of certainty. The smart contract architecture often doesn’t allow for termination or interruption, as blockchain technology is praised for being immutable and irreversible.
The Data Act also doesn’t say exactly what a “data sharing agreement” is, and it doesn’t explain if the smart contracts currently ubiquitous in Web3 applications follow these kinds of agreements.
“By design, most of smart contracts don’t offer a termination or interruption feature and are often un-upgradable to ensure higher levels of protection from abusive behaviors,” Marina Markežič, executive director and co-founder of European Crypto Initiative, told Cointelegraph.
“The fact that smart contracts lack such features puts their use and development at risk. They may be perceived as inconsistent with regulatory requirements.”
“The problem is if the scope of Article 30 were to be extended beyond the application of smart contracts in this narrowly defined context, and on public permissionless networks. It becomes not only problematic but almost impossible for such protocols to comply,” he said.
Per Voloder, another concern is whether these rules could spill over into decentralized finance (DeFi). “As we do not have a DeFi regulation, this is a question that will need an answer over the next 18 months as the EC prepares its position on DeFi.”
Moreover, kill switches can have errors because of human mistakes and, in smart contracts in general, “as they are rigid, bounded information environments.” This rigidity, plus an automatic feature that triggers a certain outcome following strict rules, could lead to issues like locking up assets, shutting down protocols or even losing funds and important data, said Voloder.
A lot of uncertainty
The Data Act has rules for vendors of an app using smart contracts, or for people whose business involves deploying smart contracts.
According to Markežič, the Data Act might cause such vendors and deployers to be more cautious and consider whether their smart contracts in any way contain a data-sharing agreement. Apps might need to change how they work to meet these rules if their smart contracts share data.
But first, it’s crucial to understand who exactly needs to follow these rules, Markežič said:
Erwin Voloder, head of policy at the European Blockchain Association, told Cointelegraph that Article 30 of the Data Act applies when parties agree to share data using a smart contract, and this contract follows the rules. It should be fine if it’s only for that situation, especially when used on a controlled network where the Data Act’s safety stop can be used.
“Is the regulation even targeted toward DeFi platforms and protocols? […] It should be clarified under what circumstances the ‘access control’ is provided, what, who, why and how the ‘safe termination or interruption’ measure is triggered and how protocols prevent further abusive behavior thereof.”
Markežič stated that, in the past, some changes and terminations were made on a protocol layer as part of the overall governance mechanisms.
A kill switch on the level of a smart contract might lump projects and individuals into “a single point of failure, prescribed by the regulators.”
Therefore, it’s critical that regulators clarify who has the power to use this kill switch.
Crypto community across the globe reacts
The crypto community has already proposed some alternative solutions to bring more legal clarity to smart contracts.
In April 2023, Polygon had already penned an open letter suggesting how to improve Article 30, sating that lawmakers could apply these rules to enterprises only, excluding software and developers, and make clear that smart contracts aren’t “agreements” in and of themselves.
More recently, the European Crypto Initiative and numerous organizations, such as Stellar, Iota, Polygon, Near, Coinbase, Cardano and ConsenSys, have signed an open letter voicing their concerns regarding the Data Act and calling on lawmakers to reconsider and clarify certain aspects.
We called on lawmakers to reconsider and clarify certain aspects of the #DataAct in our Open Letter, written with other 5 organisations and 55 signatories ✉️https://t.co/37IrdSsFXC
— European Crypto Initiative (@EuCInitiative) August 8, 2023
They argued that the Data Act could potentially clash with the recently agreed MiCA regulation. MiCA, which will come into force in 2024, provides a license for crypto exchanges and wallet providers to operate throughout the EU.
They further claim that European lawmakers deliberately sidestepped the more complex issue of decentralized financial regulation –– an issue the Commission will need to revisit in the coming years.
More harm than good?
The trialogue on the Data Act has been completed, and this means that the text has reached its final version and is likely to be enacted in its current form.
According to Markežič, the new law could affect the European crypto industry and businesses that want to operate in the EU, stating that the Data Act doesn’t give clear details about what use cases the new rules apply to, and that makes the whole industry unsure about what to expect. And this is just the first step in the direction of regulating smart contracts, setting a precedent for forthcoming actions, she said.
The next important step for the community is to work closely with European standardization groups. These groups are responsible for creating the standards that vendors and developers of smart contracts should follow when making agreements to share data, especially given that these vendors will need to make sure their smart contracts broadly align with the scope of Article 30.
According to Voloder, if the Data Act is extended to public networks, it could mean companies leaving the EU, at worst, and “otherwise being pigeonholed into a narrow development trajectory of smart contracts in the best case.”
“The result is capital flight, stifled innovation and a floundering blockchain industry in Europe. At a time when Europe is at the vanguard of the regulatory apex, the timing of such an outcome would be most inopportune.”
Sir Keir Starmer continues to face the threat of a major rebellion during a key vote on welfare reforms later – despite making last-minute concessions to disgruntled Labour MPs.
Work and Pensions Secretary Liz Kendall has confirmed that all existing claimants of the personal independence payment (PIP), the main disability benefit, will be protected from changes to eligibility.
The combined value of the standard Universal Credit allowance and the health top-up will rise “at least in line with inflation” every year of this parliament.
And an additional £300m for employment support for sick and disabled people in 2026 has been announced, which will rise every year after.
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Welfare cuts ‘needed to be made’
Ms Kendall has also promised that a consultation into PIP – “co-produced” with disabled people – will be published next autumn.
She said the U-turn on welfare cuts will cost taxpayers about £2.5bn by 2030 – less than half the £4.8bn the government had expected to save with its initial proposals.
But after announcing the U-turns, Labour MPs were still publicly saying they could not back the plans as they do not go far enough to allay their concerns.
Disabilities minister Stephen Timms would not say he was “confident” the proposals would pass the Commons when asked on Sky News’ Politics Hub with Sophy Ridge.
“We’ve got a very strong package, I certainly hope it passes,” he replied.
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1:49
‘Disabled people thrown under the bus’
A total of 86 charities united yesterday to call on MPs to reject the reforms, saying they will harm disabled people and calling it “a political choice”.
The likes of Oxfam, Child Action Poverty Group, Mind and Shelter said the bill has been brought to a vote without consulting disabled people and without any assessment “of its impact on health and employment outcomes”.
When asked to name “a single” disability organisation in favour of the reforms, Ms Kendall declined to do so.
Several Labour MPs indicated they would still vote against the changes, leaving the government in the dark over how big a rebellion it still may face.
Ms Kendall tried to allay their fears, telling MPs: “I believe we have a fair package, a package that protects existing claimants because they’ve come to rely on that support.”
Richard Burgon presented a petition to parliament yesterday evening against the cuts, signed by more than 77,000 people.
Several Labour MPs questioned why the vote was going ahead before the review into PIP is published – including Rachael Maskell, who said she could not “countenance sick and disabled people being denied support” and added: “It is a matter of conscience.”
Connor Naismith said the concessions “undoubtedly improve efforts to secure welfare reform which is fair”, but added: “Unfortunately, I do not believe these concessions yet go far enough.”
Image: Labour rebel Nadia Whittome said the government was ‘ignoring’ disabled people
Nadia Whittome accused the government of “ignoring” disabled people and urged ministers to go “back to the drawing board”.
Ian Byrne told the Commons he will vote against the “cruel cuts” to disability benefits because the “so-called concessions go nowhere near far enough”.
The vote will take place this evening, with coverage on Sky News’ Politics Hub live blog and on TV.
Other crypto firms are also reportedly considering applying for a national bank charter, following in the footsteps of Anchorage Digital Bank, which received a license in 2021.
A lower court ruling will stand in a case involving a Coinbase user who filed a lawsuit against the IRS after the crypto exchange turned over transaction data.