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.