The new approved text of the Data Act clarifies the obligation to include the “Kill Switch” in smart contracts

The last draft of the Data Act established, through its article 36, the obligation to include a “Kill Switch” in smart contracts. This obligation was heavily criticized for presenting serious problems for the decentralized blockchain ecosystem and its configuration.

The draft of this Act established the obligation for all smart contracts to have the capacity to be interrupted and terminated, and a mechanism must be included to allow this. This mechanism would be the so-called “Kill Switch”.

This mechanism is fundamentally incompatible with the very definition of smart contracts and blockchain networks. This switch introduces a centralized element into the smart contract, which is radically opposed to one of the basic principles of blockchain technology, and would significantly affect user trust as these contracts depend on external entities, which could interrupt or terminate them unilaterally.

It is true that Article 36 of the Data Law defined smart contracts very broadly and most likely it only applied to a very small subset of these. More specifically, to smart contracts programmed to execute “data exchange agreements” set out in the Data Act. Even so, uncertainty and suspicion spread across the blockchain ecosystem.

We must understand that smart contracts are a fundamental part of blockchain networks, it is the mechanism through which Decentralized Applications (DApps), Decentralized Finance (DeFi), Decentralized Autonomous Organizations (DAOs) and asset tokenization, among others, are articulated.

Final text

With the approval by the Parliament of the amended draft, we can make the following clarifications:

• Recital 104 states that the definition and regulation of Smart contracts must be carried out from a technologically neutral point of view, that is, they can be found within a blockchain network or not.

“The notion of 'smart contract' in this Regulation is technologically neutral. Smart contracts can, for example, be connected to an electronic ledger.”

• The inclusion in the Smart Contract of the “Kill Switch” switch refers only to data exchange agreements and its inclusion will be mandatory as long as it has been agreed between the parties
  
  “The essential requirement to ensure that smart contracts can be interrupted and terminated implies mutual consent by the parties to the data sharing agreement.”
  

Without a doubt, this clarification made in the final text recently approved by Parliament is great news for the blockchain ecosystem, considering that, as we have stated before, a large part of the operation of blockchain technology is based on smart contracts.

The Data Act has not defined the technical operation of the switch and how it should be included in smart contracts.