‘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 dealing exclusively with business litigation.

“Code is law” has become a slogan in this era where transactions of all kinds are shifting to blockchain platforms. Some use the term to suggest that code should replace the law in many ways when it comes to these transactions. Others use it to defend themselves against claims of wrongdoing and claim that they are simply using technically complex rules to outsmart others on a digital platform and obtain results (such as wealth) that others did not think they could or would happen.

Drawing from his 1999 book Code and other laws of cyberspaceLawrence Lessig is credited with coining the phrase “code is law,” which is the title for his 2000 Harvard magazine article† In these writings, Lessig examines problems with the then-nascent Internet and argues that the absence of government regulation does not mean there should be no regulation. Instead, Lessig argues that code written by software engineers will provide the rules for interaction and embody value judgments that will set rules for how the wider society interacts in cyberspace.

Lessig’s writing came twenty years ago, when less was known about how code and regulation would intersect. However, I consider his writings prescient. Lessig’s main argument is that we must collectively understand how code regulates the Internet, as it is the foundation of our interaction with the digital world. Since code doesn’t use discretion like humans do, an automated governance structure will change the nature of law online. He notes that code can “include or supplant values ​​from our constitutional tradition,” and that we can ensure that values ​​are not supplanted by understanding the regulator of the Internet: code. His article makes three main points:

1. Law and code must work together to run 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 its contents. This can be either a virtue or a vice; code can maintain free speech by allowing users to remain anonymous, but this anonymity can make it difficult to identify and prosecute cybercriminals. However, because code can be changed, it is “fundamentally regulatable”.

2. “The choice of code and law will be a choice of values.” Lessig gives an example of a music distribution company spying on the contents of users’ hard drives. This, he explains, is a problem with the architecture the company provides to users. He claims that only an outside regulator – the government – can fine the company and force them to change the architecture. Values ​​through formal law must therefore be given a place in the governance of the internet, just as the code itself must be governed.

3. Code regulates, but people write code. Lessig argues that we are concerned with non-regulation and that we view the concept of regulation as binary; it is present or absent. According to Lessig, minimal government intervention in cyberspace does not mean less regulation. Without government regulation, the interests of coders – who may not prioritize shared values, such as privacy – will prevail. That is, there will always be regulation, whether it be led by coders or by the government. So if the digital world “remains fundamentally skeptical about self-government” and leaves regulation only to coders, we can’t ensure that our values ​​are embedded in the code that underpins the Internet.

According to an extended take on ‘code is law’, if the code of a smart contract allows something, it is ‘legal’. This theory holds that code will prevail whether it conflicts with anything else. Those who accept Lessig’s literal meaning argue that even in the event of a bug or glitch in the code, that same code still applies. Since algorithmic law is unambiguous, they argue that it reduces the subjectivity inherent in the traditional legal and judicial systems.

The automation of rules for transactions and dispute resolution through code, rather than traditional legal avenues, has been cited as feasible in areas such as credit card disputes and suretyship agreements. In the first case, if a customer were to dispute a refund, the case could be: automatically closed† Likewise, a bill that acts as a law can be used to protect tenants in bondage disputes. If a landlord does not explain to a tenant why their security deposit has not been refunded or has stopped responding at all, there would be an automated first judgment in the tenant’s favor. If the landlord had already paid the tenant, a lawsuit could verify the relevant financial transaction and close the case automatically. Similar processes could be explored to automate aspects of other procedures, such as divorce, immigration and traffic violation appeals.

But this view has at least one major flaw; unlike in the simplest contracts, code cannot necessarily explain all eventualities. For example, withdrawals of letters of credit, which should be automatic upon submission, are sometimes imposed for breach of contract, fraud or other reasons. It is impossible to anticipate, let alone reduce to code, all the scenarios that could unfold. Contracts should be hundreds or thousands of pages long to address the nuances of every possible scenario.

As blockchain technology continues to spread and expand into new use cases, the opportunities for code to become a governance structure and provide rules for transactions will increase. Some will argue for the idea that code can replace traditional law in many interactions moving to blockchain technology. However, it is unlikely that the code will replace the law in a broad sense.

Governments fond of regulation will not allow this at all, and the variety of disputes that can arise – based on ambiguities in language, contingencies and errors in coding – will create situations where aggrieved parties will seek help ( and need) of the traditional legal system. How courts and lawmakers draw lines remains to be seen, especially in cases where savvy individuals claim to have followed the “rules” of the code.

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