The EU’s Data Act: Smart Contracts at Risk?

European policymakers have made significant progress on designing a comprehensive legal and regulatory framework for digital assets. Earlier this month, the EU published the Markets in Crypto Assets (MiCA) regulation, which provides the regulatory clarity needed to foster competition, innovation, and transparency. Under MiCA, EU policymakers committed to a timeframe to assess decentralized finance and to decide whether further regulations are needed to complement MiCA.

In parallel, European policymakers are working on data sharing as part of the Data Act, a piece of legislation nearing finalization. The purpose of the Data Act is to regulate data sharing in the context of Internet of Things products, like smart devices, but it also includes a provision on smart contracts.

While this legislation is not intended to regulate smart contracts beyond the scope of the Act, the smart contracts provision may have damaging, wide-ranging implications. Specifically, the proposed text could impose unworkable requirements on smart contracts built on public blockchains, such as requirements that smart contracts have termination and interruption features, among others. As outlined in this letter, we strongly believe that adding additional language that clarifies the scope of the Data Act would be in line with the intention of legislators.

Smart contracts built on blockchain are the backbone of the decentralized finance ecosystem, and can help make payments more efficient, secure, and resilient. Smart contracts can be used for any number of programmable actions that governments or citizens may seek to put on the blockchain, including lending arrangements for small businesses and access to inclusive insurance. Smart contracts allow for the automated initiation of payments on confirmed receipt of goods, the routing of tax payments directly to tax authorities at point of sale, payments on securities and interest, and social payments for relief programs or emergency cash transfers.

MiCA’s finalization has helped establish Europe as a significant international player in blockchain. We are hopeful that EU authorities will clarify the scope of the Data Act to ensure the continued growth and development of this industry, and look forward to further engagement with European policymakers on the design of a comprehensive, effective legal and regulatory framework for digital assets and blockchain technology.