Europe’s blockchain industry is facing the threat of onerous regulations on decentralised protocols that rely on smart contracts under the Data Act, which is set to regulate data shared between smart devices within Internet-of-Things networks. The legislation aims to establish high-level requirements for smart contracts, whether or not they are based on blockchain technology or a more traditional database. However, advocates, including the European Crypto Initiative, are concerned that the law is not clearly defined and could negatively impact DeFi in the bloc.
“The worst-case scenario is whether we would even be able to use public blockchains for using smart contracts while complying with the Data Act requirements,” warned Marina Markezic, executive director of the European Crypto Initiative.
The crypto industry is making a final push to prevent laws that could crush smart contracts that underpin decentralised protocols. The European institutions hope to promote the use of smart contracts through the Data Act and do not intend to regulate ledger technology. However, a source close to the negotiations revealed that the industry’s concerns will be addressed as negotiations continue in the coming weeks.
The European Parliament, together with the European Council and Commission, needs to reach a final political agreement during trilogues to conclude the Data Act. In the final stretch of the legislative process, the three institutions leading the negotiations have each reached their own stance on the legislation. The next trilogue meeting is on 23 May, which will try to solve most of the outlying issues with the Data Act text.
Alarm bells went off for the industry with Article 30, which includes “essential requirements regarding smart contracts for data sharing.” If passed, the law would require smart contracts to be designed in a way that allows for them to be terminated or interrupted, which opposes the nature of blockchain-based smart contracts. Additionally, smart contracts would also need to be “protected through rigorous access control mechanisms at the governance and smart contract layers,” the bill reads.
Recently, the EU parliament passed the first comprehensive crypto law in the world when it approved the MiCA Act. The Transfer of Funds Regulation (TFR), which requires cryptocurrency providers to identify their clients in an effort to stop money laundering, was also passed. The MiCA regulation is a significant step forward for the European Union’s cryptocurrency sector, as it aims to establish uniform regulations and standardise rules for digital assets there. This will ease the compliance burden on the sector’s businesses, which currently have to comply with 27 different regulatory frameworks across the EU’s member states.
The crypto industry in Europe is facing uncertainty due to the lack of clarity in the Data Act’s regulations on smart contracts. If passed, the law could negatively impact DeFi in the bloc. However, the MiCA Act’s passing could ease compliance burdens on the sector’s businesses and standardise rules for digital assets. It remains to be seen whether the concerns of the blockchain industry will be adequately addressed in the negotiations on the Data Act, which are set to conclude at the end of June.