Europe introduces smart contract ‘kill switch’ — what it means for DeFi systems

• New Euro­pean law pushed for con­trol over cryp­to and blockchain tech through smart contracts.
• The cryp­to com­mu­ni­ty expressed con­cern over the risk of a smart con­tract kill switch mandate.

Euro­pean reg­u­la­tors are turn­ing up the heat on cryp­to and blockchain reg­u­la­tion just like their Amer­i­can coun­ter­parts. The recent­ly passed Euro­pean Par­lia­ment Act has a sec­tion that seeks to imple­ment more con­trol over smart contracts.

Arti­cle 30 of the Euro­pean Par­lia­ment Act touched on reg­u­la­to­ry guide­lines regard­ing smart con­tracts. The seg­ment required par­ties offer­ing smart con­tracts to offer robust con­trols that can pre­vent third-par­ty manip­u­la­tion or func­tion­al errors. While this seg­ment seems well and good, it is the sec­ond part that might be of contention.

The smart contract kill switch

Sec­tion B of arti­cle 30 requires smart con­tract providers to incor­po­rate con­trol mech­a­nisms for ter­mi­nat­ing trans­ac­tion exe­cu­tion. In oth­er words, the mech­a­nism will facil­i­tate some lev­el of con­trol to enable smart con­tract inter­rup­tion or stop­page. Such fea­tures can act as a dou­ble-edged sword. For exam­ple, they may offer a third-par­ty lev­el of con­trol through which reg­u­la­tors can dic­tate or over­see usage.

#cryp­tonews: The #Euro­pean Par­lia­men­t’s pas­sage of the EU Data Act may man­date a “kill switch” that would let smart con­tracts be can­celed, endan­ger­ing every­thing from #DeFi to #NFTs. 👀https://t.co/ga7pfxDEHP

— Coin­Mar­ket­Cap (@CoinMarketCap) March 15, 2023

Sec­tion B is aimed at adding an extra lay­er of secu­ri­ty, espe­cial­ly against exploits. This focus may offer some con­tra­dic­tions to what DeFi is sup­posed to be. Smart con­tracts are sup­posed to pro­vide auton­o­my in trans­ac­tions, thus elim­i­nat­ing third par­ties. This means devel­op­ers have to con­sid­er fac­tors that pre­vent exploits.

Allow­ing third-par­ty con­trol negates the entire idea of self-exe­cut­ing smart con­tracts. Arti­cle 30 may effec­tive­ly give the Euro­pean gov­ern­ment lee­way to shut down DeFi. As such, the stip­u­la­tion trig­gered new con­cerns in the DeFi community.

The second wave of the war against the crypto market

As not­ed ear­li­er, U.S reg­u­la­tors kick start­ed a war against cryp­tocur­ren­cies in Feb­ru­ary by order­ing banks to cease cryp­to deal­ings. This new­ly approved bill may under­score the next wave of the war against cryp­to. This time, the war is head­ed direct­ly to the tech­nol­o­gy that under­pins the cryp­to industry.

It is still anyone’s guess whether these efforts will hurt the mar­ket. That may not nec­es­sar­i­ly be the out­come because of juris­dic­tions. It will be dif­fi­cult for gov­ern­ments to exe­cute such man­dates on decen­tral­ized tech­nolo­gies and even hard­er to shut down such tech­nolo­gies. The FUD asso­ci­at­ed with such devel­op­ments is the most imme­di­ate dan­ger. But at this point, the mar­ket has already endured heavy hits and this new attempt might thus not have much of an impact.