Crypto could be at risk from EU's new 'kill switch'

crypto President of the European Commission Ursula von der Leyen speaks at a news conference during European Union leaders' summit in Brussels, Belgium October 21, 2022. REUTERS, Belgium October 21, 2022. REUTERS/Yves Herman
President of the European Commission Ursula von der Leyen. Crypto proponents are worried that new EU legislation could undermine smart contract technology on blockchains. Photo: Yves Herman/Reuters

The European Union (EU) is planning regulation to protect consumers from rogue artificial intelligence, but cryptocurrency advocates warn it could undermine blockchain technology.

The EU's new Data Act includes a "kill switch" for autonomous self activating code, or smart contracts, to ensure harmful blockchain-based algorithms can be nullified.

But the kill switch could in effect allow a centralised authority to interfere with blockchains and erode their immutability by changing in retrospect what has been recorded on a blockchain

The Data Act could require developers to factor in termination code for smart contracts deployed on applications that run on Ethereum (ETH-USD), Solana (SOL-USD), Cardano (ADA-USD) or any other blockchain.

Crypto advocates argue that this compromises the uncorruptable and permanently locked nature of blockchains and erodes their usefulness — a scenario that has the crypto-industry losing sleep.

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This is because smart contract technology is the essential functionality of blockchain networks, and promises to power the innovations of web3 without the need for trusted intermediaries.

Marta Belcher, a cryptocurrency and civil liberties attorney, said there should be no "kill switch" provision added to blockchain-based smart contracts.

Belcher told Yahoo Finance UK: "The text of the 'kill switch' provision as it currently stands seems to misunderstand how smart contracts actually work; in its current form, it would require 'that mechanism exists to terminate the continued execution of transactions' and that the smart contract 'include internal functions which can reset or instruct the contract to stop or interrupt the operation'.

"As currently written, this is untenable, to me, this brings to mind the push by governments to create backdoors in encrypted technologies.

"The thing is, when governments try to force innovators to create these 'backdoors', or, in this case, a kill switch, it creates technology that is less secure and more easily exploited by bad actors, and, frankly, it undermines the whole purpose of the technology."

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Blockchain-based smart contracts meets artificial intelligence

Blockchain technology could help improve the trustworthiness and transparency of the data sets that artificial intelligence (AI) systems could use in order to interact safely and effectively in the world.

AI models could be embedded in smart contracts that can automatically execute decisions on a blockchain.

This could include recommending expired products for recall, executing transactions on payroll networks, automatically reordering stock, fuel or equipment, selecting the most sustainable supply chain methods, or in the financial realm, autonomously making stock purchases based on set thresholds.

But, there is also the question of what would happen if the code went wrong, and began executing orders that were detrimental to a business, or even human lives?

Blockchain for Europe Summit

During Wednesday's Blockchain for Europe Summit, debate intensified over smart contracts and their association with the burgeoning AI sector.

Should people trust the code, or do 'kill switches' need to be implemented?

Thibault Schrepel, associate professor at the Department of Transnational Legal Studies, VU Amsterdam, argued that the new legislation being finalised as part of the EU's Data Act will compromise a key aspect of why blockchains have a use-case.

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He said: "If smart contracts should have a kill switch function then my concern is that, from a governance perspective, the immutability aspect of blockchains is gone as a principle.

"Enacting the current legislation is a concern, because if you do so, you remove the good things that come with immutability."

Belcher said: "Any time you introduce any of these types of things, you are fundamentally altering the technology, and the safety and security of the entire system, making it less safe and less secure."

Giving an example of a useful self-activating code, she said: "With a 'smart contract' you can program your money and write code that automatically transfers value.

"You can write a smart contract that moves one millionth of a cent to the artist for every minute of their song you listen to."

Lee Schneider, general counsel at Ava Labs, warned that "artificial intelligence 'smart contracts' and machine learning are already making decisions that the programmers may not have intended."

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In February of this year, executive vice-president for the European Commissioners' group on a Europe fit for the Digital Age Margrethe Vestager, said: “We want to give consumers and companies even more control over what can be done with their data, clarifying who can access data and on what terms.

“This is a key Digital Principle that will contribute to creating a solid and fair data-driven economy and guide the Digital transformation by 2030.”

Thierry Breton, EU commissioner for internal market, said: “The Data Act will ensure that industrial data is shared, stored and processed in full respect of European rules. It will form the cornerstone of a strong, innovative and sovereign European digital economy.”

A representation of cryptocurrency Ethereum is seen next to non-fungible tokens (NFTs) of Yuga Labs
New legislation could affect NFT series such as the thousands of Bored Ape Yacht Club images. Photo: Florence Lo/Reuters

Markets in Crypto Assets (MiCA) legislation

The EU is also pushing through another piece of legislation aimed at clarifying regulatory procedures within the crypto-sector.

The Markets in Crypto Assets (MiCA) legislation is expected to be published in the EU's official journal early next year before taking effect in 2024.

The bill introduces the first-ever licensing regime for crypto wallets and exchanges to operate across the EU and imposes minimum reserve requirements for stablecoin issuers.

Checks on fund transfers will also need to be implemented by crypto wallet providers, in a bid to cut money laundering.

NFTs that exhibit fungible qualities, meaning they can be easily interchanged, could also fall under the new legislation.

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This could include the development fractionalised assets of NFTs that can be traded for other fractionalised tokens and NFT series such as the thousands of Bored Ape Yacht Club images.

MiCA legislation says: “The issuance of crypto-assets as non-fungible tokens in a large series or collection should be considered as an indicator of their fungibility".

Yahoo Finance UK contacted the European Commission's Data Policy and Innovation body about the Data Act for comment but did not receive a reply.

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