Crypto may be at risk of the EU’s new “kill switch”
The European Union (EU) is planning regulation to protect consumers from fake artificial intelligence, but cryptocurrency advocates warn it could undermine blockchain technology.
The EU’s new data law includes a “kill switch” for autonomous self-activating code, or smart contracts, to ensure that malicious blockchain-based algorithms can be invalidated.
But the kill switch could actually allow a centralized authority to disrupt blockchains and erode their immutability by subsequently altering what is recorded on a blockchain
The Data Act may require developers to consider termination code for smart contracts deployed on applications running on Ethereum (ETH-USD), Solana (SOL-USD), Cardano (ADA-USD), or any other blockchain.
Crypto advocates argue that this compromises the incorruptible and permanently locked nature of blockchains and erodes their usefulness – a scenario that causes the crypto industry to lose sleep.
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This is because smart contract technology is the essential functionality of blockchain networks, and promises to drive the innovations of web3 without the need for trusted intermediaries.
Martha Belchera cryptocurrency and civil rights lawyer, 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 stands now appears 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 ‘includes internal functions that can reset or instruct the contract to stop or abort the operation’.
“As currently written this is unsustainable, for me it brings to mind the push by governments to create back doors in encrypted technology.
“The trick is that when governments try to force innovators to create these ‘back doors,’ 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 the purpose of the technology.”
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Blockchain-based smart contracts meet artificial intelligence
Blockchain technology can help improve the reliability and transparency of the datasets that artificial intelligence (AI) systems can use to interact safely and efficiently in the world.
AI models can be embedded in smart contracts that can automatically execute decisions on a blockchain.
This can include recommending expired products for recall, conducting payroll network transactions, automatically reordering inventory, fuel or equipment, choosing the most sustainable supply chain methods, or in the financial sphere, autonomously making stock purchases based on set thresholds.
But there is also the question of what would happen if the code went wrong and started executing orders that were harmful to a business, or even human life?
Blockchain for Europe Summit
During Wednesday’s Blockchain for Europe summit, the debate intensified about smart contracts and their connection to 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 finalized as part of the EU Data Protection Act will compromise a key aspect of why blockchains have a use case.
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He said: “If smart contracts were to have a kill switch feature, my concern is that from a governance perspective, the immutability aspect of blockchains is gone as a principle.
“Passing current legislation is a concern because if you do that, you take away the good things that come with immutability.”
Belcher said, “Any time you introduce any of these kinds of things, you fundamentally change the technology and the safety and security of the whole 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 a millionth of a cent to the artist for every minute of the 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 this year, Executive Director of the EU Commissioners’ Group for a Europe Fit for the Digital Age Margrethe Vestager said: “We want to give consumers and businesses even more control over what can be done with their data and clarify who can access it to data and on what terms.
“This is a key digital principle that will help create a solid and fair data-driven economy and lead the digital transformation by 2030.”
Thierry Breton, EU Commissioner for the 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 superior European digital economy.”
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 it enters into force 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 money transfers will also need to be implemented by crypto wallet providers, in an effort to reduce money laundering.
NFTs that exhibit fungible qualities, meaning they can be easily exchanged, may also fall under the new legislation.
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This could include developing fractionalized assets into NFTs that can be traded for other fractionalized tokens and NFT series like thousands of Bored Ape Yacht Club photos.
The MiCA legislation states: “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 Agency on the Data Act for comment, but did not receive a response.
