EU eases regulatory burden for crypto smart contracts in draft legislation

The European Union's plans to regulate crypto smart contracts, the infrastructural underpinnings of decentralized finance, look to be heading in a less onerous direction. 

After lawmakers in the European Parliament reached agreement on a new text of the Data Act, the article on smart contracts shed some of its weight and reduced its scope, a draft proposal obtained by The Block shows.

The draft shows that sellers or offerers of smart contracts, for example, will no longer need to perform a conformity assessment and sign a mandatory declaration that they comply with EU requirements. Expectations for smart contracts to meet so-called harmonized standards, or technical compliance specifications, were also dropped. 

The text also reduces the scope to only cover “the contractual party offering a smart contract,” instead of a broader group covering vendors or professionals involved in the deployment of smart contracts.

The EU plans to regulate smart contacts under its broader strategy on data markets. The legislation is likely to have far-reaching effects on crypto, as such contracts — written in software code — underpin the infrastructure of DeFi. 

'Rigorous' control mechanisms

Despite the signs of the EU loosening its grip, the draft legislation still contains some firm moves to regulate crypto technology. Provisions include “rigorous access control mechanisms” and protection of trade secrets integrated into the design of smart contracts. There will need to be a possibility to terminate or interrupt transaction mechanisms and lawmakers will need to decide which conditions would make that permissible.

On top of that, smart contracts will be expected to face the same “level of protection and legal certainty as any other contracts generated through different means,” according to the draft.

The committee on industry leading negotiations on the file will vote to adopt the text on Feb. 9. Then it will need to go through a plenary vote in Parliament, currently expected in March. If passed, the file would then move forward to inter-institutional negotiations together with the European Commission and European Council.