Key Insights:
A new law by the European Union allows authorities to virtually kill any smart contract that they want to erase. The law passed on 9 November 2023, is called the Data Act. It has a clause inside which mandates smart contracts to have an in-built kill switch.
Smart contracts are the founding blocks of Web3. They form the base layer of any Web3 activity such as DeFi, DEX, NFT, Swapping, Blockchain Bridges, etc.
Article 30 of the Data Act passed by the European Parliament wants not only greater and selective control over who can access the smart contracts but also wants all smart contracts to be made in a way that facilitates their safe destruction, i.e., essentially a kill switch.
The article also demands that any entity issuing smart contracts should have a very high degree of rigorous access control mechanism. This means that smart contracts are supposed to be designed in a way which only selectively allows or disallows people.
The second act seems more controlling than the first since it can impact a great number of people with a single regulatory decision.
Currently, all the smart contracts can be accessed by anyone with a valid crypto wallet. A permissioned entry will not only make the system more centralized but will also give a free run for greater control. This is because, for selective entry, wallets have to be identified which goes against the values of anonymity in blockchain.
Now, this not only confuses but also creates a FUD moment for blockchain companies, developers as well as users.
Smart contracts are designed in a way that once coded, they cannot be tampered with or changed. So, if a smart contract, for example, the Ethereum 2.0 Deposit Contract, has been coded and deployed in the past, how will it comply with the law?
It is also unclear if this law requires all smart contracts to be re-deployed or only wants new ones to be created in the way that it deems fit.
The blockchain industry has criticized the act for several things such as lack of clarity, its potential to create a capital exodus out of Europe, and its ability to stifle innovation.
An open letter was also written by industry associations such as the European Blockchain Association, IOTA, DCG, INATBA, and others, but it seems it went in vain.
When such a law is enforced, Blockchain companies would rather find it easy to change their base from Europe to a blockchain-friendly country such as UAE or Singapore.
In UAE, blockchain companies currently enjoy favourable regulations, zero tax policy as well as friendly regulatory authorities.
Top European blockchain companies that extensively use smart contracts and might be at the risk of capital exodus are listed below.
Blockchain technology is based on three core principles: immutability, anonymity and decentralization. The Data Act of the European Parliament seeks to violate all three.
If smart contracts are made in a way that allows authorities to kill them at will, it will not allow previously scheduled transactions to be finalized. This is because the entire smart contract will go missing after it is killed. This will hamper the immutability of the blockchain.
Clause (b) of Article 30 wants smart contracts to be designed in a way that allows selective access. Now, that is not possible currently because blockchain addresses and wallets are anonymous. If the law seeks to implement clause (b), the wallet addresses must be marked with names or addresses, violating the anonymity in a blockchain.
Finally, the law violates decentralization as it allows a few specific people, i.e., law officers to control the ability of users to transact.
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