The Future of Smart Contracts in the EU: Analyzing the Data Act’s New Framework

The European Union (EU) regulators have proposed the Data Act, which is now in the process of trialogues. While the Data Act aims to modernize and harmonize the rules regarding data sharing rules across the EU, it also touches upon smart contracts. As part of this proposal, the regulators have defined smart contracts in Article 2(16) and further outlined the essential requirements for smart contracts executing data-sharing agreements in Article 30.

They proposed the following definition of a smart contract:

Smart contracts are “computer programs that automatically execute the terms of a contract when predetermined conditions are met.”

This definition is rather broad and encompasses various different types of computer programs, including the ‘smart contracts’ used in the context of the Web3 ecosystem. It recognizes the growing importance of smart contracts in the digital economy and highlights their potential to automate and streamline business processes. However, read along with the Article 30 of the Data Act, this may have significant negative implications for everyone relying on public blockchain infrastructure. 

Article 30 of the draft proposal outlines the essential requirements for smart contracts executing data-sharing agreements. These requirements include ensuring that the smart contract is designed to offer access control mechanisms and a very high degree of robustness to avoid functional errors and to withstand manipulation by third parties. While robustness and control mechanisms sound ok, the requirement of a ‘safe termination and interruption’ undermines the core values and desired characteristics of most of the smart contracts we use today. 

These essential requirements primarily apply to the vendors of the smart contracts (e.g. a company using and offering such a smart contract to its end users of their services). However, would a vendor be absent, the responsibility falls on a developer deploying such a smart contract. 

We’ve already discussed this when we issued our Position Paper. Since our Position Paper was circulated among the regulators and publicized in the media, the regulators have communicated a consolidated text that does not resolve the issues described above. 

This is why EUCI has joined its efforts with other advocacy groups representing the blockchain industry to issue an Open Letter describing our concerns regarding the regulation of smart contracts as described below.  On this note, we’d like to express special thanks to Blockchain4Europe, Digital Currencies Governance Group, European Blockchain Association, INATBA, IOTA and all other professionals contributing their valuable insights, comments, brainpower and expert opinions. 

The Open Letter advocates for technological neutrality, ensuring freedom of choice and adaptability of regulations, irrespective of the technology used. It proposes refinements emphasizing three key potential amendments that aim to clarify the regulator’s intention and minimize potential negative impacts: 

1. Substitute the term ‘Smart Contract’ with ‘Digital Contract’ to reflect the Act’s intended scope more accurately and to eliminate ambiguities about the applicability of Article 30’s stringent requirements.

2. Clarify the scope of Article 30 in case the change of terminology proves unsuitable. In this scenario, we recommend revising Article 30 to narrow down its applicability to ‘Smart Contracts’ deployed on private and permissioned electronic data records.

3. Limit Article 2(16) to privately operated and permissioned electronic data records, which, although it is the least favorable option, could still mitigate some of the potential negative impacts if the other two options do not materialize.

We believe these proposed changes align with the principle of technological neutrality, ensuring equal treatment to all technological solutions and fostering an environment conducive to innovation and growth.

If you wish to support this Open Letter, send your logo and information about your organization to us. Together we can achieve better regulation and create a safe space to foster innovation utilizing blockchain-based smart contracts.