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'Code Is Law' During The Age Of Blockchain

John B. Quinn is the founder of Quinn Emanuel Urquhart & Sullivan LLP, the world's largest law firm devoted solely to business litigation.

“Code is law” has become a catchphrase in this age where transactions of all sorts are being shifted onto blockchain platforms. Some use the term to suggest that code should replace law in many respects when it comes to these transactions. Others use it to defend against claims that they have acted wrongly and argue that they are simply using technically complex rules to outsmart others on a digital platform and obtain outcomes (like wealth) that others did not believe could or would occur.

Drawing from his 1999 book Code and Other Laws of Cyberspace, Lawrence Lessig is credited with coining the phrase “code is law,” which is the title for his 2000 Harvard Magazine article. In these writings, Lessig explores issues with the then-nascent internet, and posits that the absence of government regulation does not mean there should be the absence of any regulation. Instead, Lessig asserts that code written by software engineers will provide the rules of interaction and embody value judgments that will set rules for how broader society interacts in cyberspace.

Lessig’s writing came twenty years ago when less was known about how code and regulation would intersect. However, I see his writings as prescient. Lessig’s main argument is that we must collectively understand how code regulates the internet, as it is the basis of our interaction with the digital world. Since code does not employ discretion the way humans do, an automated governance structure will change the nature of law online. He notes that code can either “embed, or displace, values from our constitutional tradition,” and that we can ensure that values are not displaced by understanding the regulator of the internet: code. His article makes three main points:

1. Law and code must work in tandem to govern the internet. The internet’s governing code protocols (TCP/IP) allow data to be shared across networks without identifying the source of the data or any of its substance. This can be both a virtue and a vice; code can uphold freedom of speech by allowing users to remain anonymous, but this anonymity can make it hard to identify and prosecute cybercriminals. However, because code can be altered, it is “fundamentally regulable.”

2. “The choice about code and law will be a choice about values.” Lessig offers an example of a music distribution company spying on the contents of users’ hard drives. This, he explains, is an issue with the architecture the company provides to users. He asserts that only a third-party regulator—the government—could impose a penalty on the company and force them to alter its architecture. Thus, values through formal law must have a place in the governance of the internet, as code itself must be governed.

3. Code regulates, but people write code. Lessig argues that we are preoccupied with nonregulation and that we view the concept of regulation as binary; it is either present or absent. According to Lessig, minimal government intervention in cyberspace will not mean less regulation. Absent government regulation, the interests of coders—which may not prioritize shared values, such as privacy—will reign. That is, regulation will always exist, whether led by coders or by the government. Thus, if the digital world remains “fundamentally skeptical about self-government,” and leaves regulations to coders only, we cannot ensure that our values will be embedded in the code that undergirds the Internet.

Under an expansive view of “code is law,” if the code of a smart contract permits something then it is “legal.” This theory holds that code shall prevail, whether or not it conflicts with anything else. Those who accept Lessig's literal meaning contend that, even in the event of a bug or glitch in the code, that same code still governs. Since algorithmic law is unambiguous, they argue that it reduces the subjectivity inherent in the traditional legal and judicial systems.

The automation of rules governing transactions and dispute resolution through code, rather than traditional legal avenues, has been cited as viable in areas such as credit card disputes and security deposit agreements. For the former, if a customer were to dispute a charge that was refunded, the case could be closed automatically. Similarly, code operating as law could be used to protect tenants in security deposit disputes. If a landlord fails to explain to a tenant why their security deposit was not refunded or stopped replying to the tenant altogether, there would be an automated initial judgment favoring the tenant. If the landlord had already paid the tenant, a process could verify the relevant financial transaction and automatically close the case. Similar processes could be explored to automate aspects of other proceedings such as divorces, immigration cases and traffic violation appeals.

But this view has at least one major shortcoming; other than in the simplest of contracts, code cannot necessarily account for every eventuality. Drawdowns on letters of credit, for example, which are supposed to be automatic on presentation, are occasionally enjoined for nonperformance, fraud or on other grounds. It is impossible to anticipate, let alone reduce to code, all scenarios that might unfold. Contracts would have to be hundreds or thousands of pages long to address the nuances of every possible scenario.

As blockchain technology continues to proliferate and expand to new use cases, opportunities for code to become a governing structure and provide rules for transactions will increase. Some will argue for the notion that code can replace traditional law across many interactions that move to blockchain technology. However, it is unlikely that code will replace law in any large sense.

Governments keen on regulating will not entirely allow it, and the variety of disputes that can arise—based on ambiguities in language, unforeseeable outcomes and flaws in coding—will create situations where aggrieved parties will seek (and need) the help of the traditional legal system. How courts and lawmakers draw lines remains to be seen, particularly in cases where smart individuals claim to have followed the “rules” set out by the code.


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