Chapter Title: Code as Law

Book Title: Blockchain and the Law

Book Subtitle: The Rule of Code
Book Author(s): Primavera De Filippi and Aaron Wright
Published by: Harvard University Press

Stable URL: https://www.jstor.org/stable/j.ctv2867sp.15

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Blockchain and the Law

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 12
Code as Law

While governments could fail to regulate blockchain technology comprehen­

sively, they may nonetheless rely on blockchains as a means to apply their own
laws and regulations in a more efficient and automatic way. Similar to how gov­
ernments and corporations have progressively embraced and integrated the op­
portunities provided by the Internet and digital technologies into their everyday
operations, both public and private actors could potentially use blockchain
technology to establish their own system of rules and regulations, implemented
using self-­executing, code-­based systems. Leveraging the transparency and
tamper re­sis­tance of a blockchain along with the automatic execution of smart
contract code, governments have the opportunity to experiment with new means
of code-­based regulation to achieve specific policy goals and potentially constrain
blockchain-­based applications.
With blockchain technology and associated smart contracts, a growing range of
­legal and contractual provisions can be translated into ­simple and deterministic
code-­based rules that are automatically executed by the under­lying blockchain
network. Thus, not only is it impor­t ant to understand how blockchain-­based
applications can be regulated, but it is also necessary to assess how lex crypto-
graphica can be used for regulation.

REGARDLESS OF THEIR objectives, all laws and regulations share a similar

goal: to guide be­hav­ior so as to encourage ­people to act in a par­tic­u ­lar
manner.1 Laws can introduce a set of incentives or reward systems for ­people
to behave in a desirable way, or they can impose a system of punishment or

193

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194 BLOCKCHAIN AND THE LAW

sanctions for ­those who behave in nondesirable ways.2 Through ­either ap-
proach, governments directly affect ­people’s motivations, acting as ­either a
carrot or a stick.3 However, individuals are ultimately ­free to choose the best
course of action.
As with law, technology has a similar capacity to influence an individu-
al’s be­hav­ior.4 Technology provides a means for ­people to do ­things that they
would be unable to do other­wise, such as flying on an airplane or commu-
nicating through a phone line, but it also dictates the way in which ­these
­things can be done, such as setting the maximum speed of an aircraft or the
bandwidth of a telephone line.
As opposed to the law, however, technology does not leave much room
for p
­ eople to decide which course of action to take. Instead, it relies on rigid
rules and technical features to provide a par­tic­u­lar set of affordances and
constraints that ultimately shape ­human interactions.5
Up to this point, technology was assumed to sit beside the law as a
regulatory lever that influenced h ­ uman be­hav­ior.6 However, with the ad-
vent of the Internet and digital technology, code has become an impor­
tant regulatory lever used by both public and private institutions to shape
a growing range of activities in ways that often extend beyond the law.7
Indeed, as Lawrence Lessig explained back in 1999: “Cyberspace ­will pri-
marily be regulated by . . . ​c yberspace”—­meaning that code w ­ ill eventu-
8
ally become the “supreme law in the cyberspace.” In other words, as
Charles Clark expressed, “The answer to the machine is the machine.”9
The best way to regulate a code-­based system is through code itself.
Both Lessig’s and Clark’s statements ring particularly true in the context
of blockchains. Indeed, if governments strug­gle to enforce laws against au-
tonomous blockchain-­based systems, they could explore relying on block-
chain technology itself to set up a new framework of code-­based regulation
to regulate p ­ eople, companies, and machines.
With blockchain technology and associated smart contracts, ­legal and
contractual provisions can be translated into ­simple and deterministic code-­
based rules that w ­ ill be automatically executed by the under­lying block-
chain network. Technical rules could increasingly assume the same role and
functionality as ­legal rules.10

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Code as Law 195

Transposing Law into Code

In much the same way that code can be used to memorialize all or parts
of ­legal agreements, governments have the ability to model laws and
regulations—­especially ­those with objectively verifiable restrictions or par­
ameters—­and incorporate them into code.
Code has increasingly been used by governmental authorities or public
administrations to incorporate and implement existing laws and regulations—­
mostly ­those of an administrative nature. ­These software programs cover a
broad range of applications, from assessing ­people’s eligibility for welfare ben-
efits and public aid 11 to identifying parents who might be required to
provide child support.12
For instance, several states in the United States rely on computer soft-
ware to calculate ­whether low-­income citizens qualify for the Supplemental
Nutrition Assistance Program and to calculate their entitlement to food
stamps.13 The United States also uses data mining and big data analytics to
make predictive assessments on national security threats, automatically put-
ting ­people on a no-­fly list to protect against terrorist threats.14
By developing t­ hese code-­based systems, governments seek to ensure l­egal
compliance. By translating laws into technical rules, ­legal provisions are au-
tomatically enforced by the under­lying technological framework. Instead
of hunting down wrongdoers ­after a ­legal infraction, code-­based systems can
ensure greater compliance with the law by preventing violations before they
occur. Delegating the task of applying t­hese rules to a technical system
lessens the risk of anyone failing to implement such rules—­whether in-
advertently or willingly—ultimately decreasing the need for oversight and
ongoing enforcement.
In some cases, transposing laws into code reduces the uncertainty
around the interpretation or application of ­these rules. ­Because computer
code is written in a strict and formalized language, governments can pre-
cisely specify, ex-­ante, the manner in which laws should be applied. Unlike
laws written in natu­ral language, code-­based rules leave less room for in-
terpretation and can therefore be implemented more consistently and
predictably.15
Some rules and regulations are particularly suitable for formalization into
the language of code.16 This is particularly true with laws containing rules
that are both straightforward and unambiguous, such as ­those related to the

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196 BLOCKCHAIN AND THE LAW

issuance of welfare and social benefits, food stamps, or even t­ hose related to
the calculation of taxes and other payment obligations. Regardless of the
complexity inherent in ­these rules, as long as their provisions can be trans-
lated into a series of conditionals (“if this, then that”) or can be objectively
­ ill be pos­si­ble to transpose them into code.17
verified, it w
Code-­based rules can also conceivably be more easily fine-­tuned to spe-
cific individuals, with dif­fer­ent conditions triggered according to their cur-
rent or past be­hav­ior. With the growing reliance on big data analyses and
machine learning techniques, it is pos­si­ble to assem­ble a profile for an indi-
vidual by looking at the way in which that individual behaves both online
and offline.18 If such data w ­ ere used to inform the operation of specific
software applications, it could lead to the emergence of a new generation of
highly customized rules or regulations that can be automatically adjusted
to the specific needs and characteristics of the individuals at hand.19

Blockchain Technology as Regulatory Technology

Like other software, blockchains could help governments translate laws into
code. Blockchain-­based protocols and smart contracts can be used to model
or represent laws and embed them directly into the fabric of a blockchain-­
based network to ensure the automatic execution and ex-­ante enforcement
of ­these rules. By transposing laws into a smart contract and requiring that
parties ­either interact with ­these smart contracts or incorporate them directly
into their information systems, governments can automate the enforcement
of specific rules or regulations without the need to affirmatively monitor each
and e­ very transaction.
Laws implemented using blockchain technology provide certain advan-
tages over traditional code in terms of both autonomy and transparency.
­Because smart contract code is executed redundantly by the under­lying
blockchain-­based network, and ­because it cannot be unilaterally manipu-
lated by any single party, transposing ­legal rules into smart contract code—­
rather than on a piece of software r­ unning on a centralized server—­means
that no centralized operator can modify t­ hese rules or prevent their execu-
tion. A blockchain-­based platform thus comes with the additional guarantee
that the rules it incorporates have been followed by all parties interacting
with the platform.

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Code as Law 197

By using smart contracts, governments could therefore ensure compliance

with regulatory requirements embodied in ­these code-­based systems. This
makes it pos­si­ble to achieve a new form of technical accountability—­​one
that is dictated by technology and that is less dependent on traditional ex-­
post enforcement.
Moreover, ­because a blockchain is both transparent and tamper resistant,
any rule implemented via a smart contract or incorporated in a blockchain-­
based protocol can be documented and recorded on a cryptographically
secure and distributed data system, providing an auditable trail of activities
performed from or tied to a par­tic­u­lar account or smart contract. From a
regulatory perspective, blockchains could prove more reliable than traditional
reporting tools in that they are not only declarative but also performative;
one cannot claim to have executed a transaction without having actually
executed it. To the extent that information recorded on a blockchain cannot
be unilaterally modified or deleted by any single party, a blockchain can be
relied on as proof that a par­tic­u­lar transaction has occurred. By incorporating
­legal requirements into a blockchain-­based protocol or smart contract, gov-
ernments thus can determine when and how the law was applied and with
whom—­without incurring the risk that a centralized operator tampered with
the logs.20
As an illustration, governments around the globe implement anti–­money
laundering (AML) regulations, which require that financial institutions track
flows of value (including virtual currencies) and report suspicious activity
to stamp out money laundering, tax evasion, and terrorist financing.21 By
relying on a blockchain, laws could require that regulated intermediaries—­
such as virtual currency exchanges—­implement or interact with specific
smart contracts that control the flow of transactions for t­ hese regulated in-
termediaries, enabling transactions to occur only if they satisfy the strict logic
of the under­lying code. A blockchain could be used, for instance, to verify
­whether an individual is permitted to transfer virtual currency and—­
according to the information retrieved from the blockchain—­a smart con-
tract could limit the amount of virtual currency a person is legitimately
entitled to transfer at any given time.
The same could apply in the case of derivatives-­based smart contracts.
Title VII of the Dodd-­Frank Act modified the U.S. Commodities Exchange
Act, introducing new reporting rules and increasing the margin requirements

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198 BLOCKCHAIN AND THE LAW

for uncleared derivatives. Compliance costs for the institutions affected by

­these rules can be high.22 With a blockchain, margin requirements could
be hardcoded directly into a smart contract, which would manage the
contractual relationship between the two counterparties and ensure that each
meets the required margin calls. If the risk of the trade increases ­because of
an outside event—such as an interest rate spike or a decrease in the credit
rating of one of the parties—the smart contract could automatically increase
the amount of collateral in the corresponding trading account to ensure
compliance with the law. Just as with money transmission laws, block-
chain technology could significantly reduce the costs of regulatory com-
pliance for collateral management and margin requirements, a­llowing
regulators to ensure that parties do not enter into agreements that could
create additional risks in the case of default.23
Tax collection also could conceivably be streamlined with blockchain
technology. The use of automated smart contracts could help ensure that
­people, organ­izations, and potentially even machines relying on blockchain-­
based systems pay taxes. For instance, instead of waiting for periodic tax
returns, tax authorities could require that some taxes—­such as value-­added
taxes (VAT) or personal income taxes—be automatically calculated and re-
mitted as soon as a transaction is complete by using specifically designed
smart contracts that would be executed ­every time a party receives or dis-
burses funds from a specific blockchain-­based account or whenever one party
interacts with a par­tic­u ­lar smart contract. Such a system not only would
eliminate the need for periodic tax reporting but would also reduce the op-
portunities for p­ eople or companies to engage in tax evasion or other types of
fraud. In much the same way, in the context of the Internet of ­Th ings,
smart contracts could be deployed to ensure that blockchain-­enabled devices
automatically pay taxes whenever they engage in some form of profitable
economic transaction—­even where ­t hese transactions do not involve any
­human intervention but rely only on machine-­to-­machine interactions.24
Such approaches could enable blockchain technology to achieve specific
regulatory objectives in ways that are more efficient and less costly than ­those of
existing laws and regulations. Building on Lessig’s analy­sis of how computer
code can be used on the Internet as both a complement and a supplement
to the law, the use of blockchain technology could assume an increasingly
impor­tant role in regulating the be­hav­ior of individuals and machines. To the
extent that governments and public institutions adopt this technology, we

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Code as Law 199

could shift the focus of regulation from “code is law,” using code to imple-
ment specific rules into technology,25 to “code as law,” relying on technology,
in and of itself, to both define and implement state-­mandated laws.26
To be effective, t­ hese blockchain-­based solutions need to be ­adopted by
private parties, and governments would not only need to develop smart con-
tracts and other code-­based systems but would also need to enact laws and
regulations to mandate that regulated institutions and other private parties
interact with ­these blockchain-­based systems. New laws could, for instance,
require that banks and other financial institutions interact with a government-­
backed smart contract or other code-­based systems whenever they perform
money transfers, so as to ensure compliance with money transmission laws.
Similarly, governments could require that merchants transact through a
blockchain-­based network whenever they are selling a par­tic­u­lar good or ser­
vice to ensure payment of a VAT.
Alternatively, governments could decide to reward companies and organ­
izations interacting with ­these blockchain-­based systems by relaxing ­legal
requirements or reporting obligations. ­Because a blockchain can serve as a
certified audit trail of transactions, the technology could enable govern-
mental authorities to verify ex-­post that a private actor has complied with
the law. In the case of a dispute or a public harm, a government official could
rely on the information recorded on the blockchain to precisely identify the
cause and the parties responsible for the harm, and if necessary impose rel-
evant sanctions.

Limitations of Code as Law

The pro­cess of transposing laws into code is not without pitfalls. ­There are
dangers in relying on the strict language of code to regulate individuals’
be­hav­iors.
Not all laws can be easily translated into code. L
­ egal rules are written in
natu­ral language, which is, by its very nature, inherently flexible and am-
biguous.27 Well-­constructed laws and regulations generally aim to account
for a variety of contingencies that are not always foreseen by the legislator.
By drafting ­legal rules in a broad and open-­ended manner, ­these rules can
be applied in a variety of contexts—­even ­those that ­were not expressly ac-
counted for by the legislator—­without requiring additional amendments or
changes to the existing law.28

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200 BLOCKCHAIN AND THE LAW

The flexibility of natu­ral language also brings about greater uncertainty.

Laws are interpreted and reinterpreted by judges to determine, on a case-­
by-­c ase basis, w­ hether (and how) the law should be applied to par­tic­u ­lar
situations. In some cases, a judge might even need to reinterpret the law if it
appears that—­given the facts of the case—­blindly applying the wording of the
law would violate the law’s original intent.29
Formalizing open-­ended laws—­written in natu­ral language—­into code
could distort the meaning of t­hese rules by making them less flexible and
unable to adapt to unforeseen situations.30 B ­ ecause smart contracts rely on
computer code, they are not suited for open-­ended ­legal provisions. Code
can only be applied to a set of objectively verifiable rules that have been de-
fined in the under­lying code. At least u ­ ntil the advent of more advanced AI
systems, computer code ­will generally lack the ability to adapt and ac-
count for new and unforeseen situations that might emerge in a complex
society.31 Therefore, t­ oday, smart contracts can be used only in a narrow set of
circumstances.
Given that it is virtually impossible to define in advance all pos­si­ble ways
that a par­tic­u­lar set of rules should apply in any given situation, laws relying
on a blockchain-­based system ­will likely have a narrower scope than tradi-
tional laws and regulations. Indeed, rules written in a strict and formal
language lack the flexibility of natu­ral language and are unable to account
for unexpected edge cases falling into l­egal gray areas—­those that have not
been adequately provided for in the under­lying code.32
­Because of the formality of code, translating ­legal rules into code-­based
rules could also make it easier for ­people to “game” the system. ­Unless ­every
contingency has been defined in a smart contract (which is unlikely), indi-
viduals could find ways to bypass ­these rules, ­either ­because the code is too
precise or b­ ecause it is not sufficiently broad in scope. By looking at the smart
contract code, p ­ eople can figure out what to do (or not to do) to trigger (or
not to trigger) any defined conditions in order to fall outside the scope of any
given law translated into code.
TheDAO’s hack is instructive h ­ ere. By encoding contractual rules—­
generally written in natu­ral language—­into the formalized language of
code, TheDAO’s smart contract failed to reflect the a­ ctual intentions of the
contracting parties.33 ­Because the smart contract contained a flaw, an at-
tacker managed to exploit ­these vulnerabilities and drain over $50 million

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Code as Law 201

worth of ether in a way that other members of TheDAO did not anticipate
or intend.34
If governments used smart contracts to implement code-­based rules and
regulations, similar issues would likely emerge, potentially dampening a
government’s willingness to implement laws as code. In fact, while t­ hese
limitations generally apply to all types of code, they are further exacerbated
in the context of a blockchain-­based infrastructure ­because of the resilient,
tamper-­resistant, and autonomous characteristics of smart contract code. If a
rule has not been correctly implemented as a smart contract, the consequences
of that error could prove difficult to reverse without resorting to an a­ fter the
fact judicial proceeding.

Automated Rules

The tamper-­resistant and automated nature of blockchain-­based applications

is also a double-­edged sword. While the technology could reduce the costs
of regulatory compliance and law enforcement, it could also lead to the ap-
plication of specific laws and regulations in ways that do not properly reflect
the original intentions of the legislative body.
­Legal rules rely on a system of ex-­post punishment. P
­ eople are ­free to de-
cide on their own ­whether to follow ­these rules, and ­those who are found to
violate the law are punished a­ fter the fact. Technical rules implement in-
stead a system of ex-­ante regulation, where ­people can only do what has been
specifically provided for by the code.
The benefit of a code-­based approach is that rules cannot be ­violated
without tampering with the under­lying technological framework. The draw-
back, however, is that—­given the limitations of software code—­broad
technical rules could potentially narrow opportunities for lawful activities.
By reducing permissible actions to a limited set of predefined conditions, a
framework made of rigid code-­based rules could constrain ­people’s ability
to act in ways that are legitimate ­under the law.
The automated nature of smart contracts, combined with the inability to
readily alter their under­lying code, could further lead to situations where a
faultly piece of code would be repeatedly run, to the detriment of all parties
involved. For instance, g­ oing back to the previous example of taxation, if a
government required that parties rely on a smart contract to pay taxes and

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202 BLOCKCHAIN AND THE LAW

the smart contract had a flaw in the code—­either ­because of a software bug
or an a­ ctual limitation in the way the conditions have been transposed into
code—­ a situation could emerge whereby the blockchain-­ based system
would charge parties more than what they actually owe. Given that the smart
contract code is automatically executed by the under­lying blockchain net-
work, only judicial intervention would be able to remedy the harm incurred
by t­ hese parties.

Customized Rules

Fi­nally, to the extent that blockchain-­based rules evolve to become person-

alized, they may run ­counter to fundamental notions of universality, equality,
and nondiscriminatory treatment.35 As blockchain technology further
develops, governments may choose to enact laws with provisions dictated
by a combination of smart contract code and external oracles, incorporating
outside data. By deploying code-­based laws whose application ­will be informed
by data mining and big data analy­sis, regulators could discriminate among
citizens—­who would be subject to dif­fer­ent rules depending on their identity,
profile, or current or past be­hav­ior.36
Glimmers of this world are already starting to appear. The Chinese gov-
ernment, for instance, has already proposed the implementation of a “social
credit system,”37 intended to assign a national score (or reputation) to ­every
Chinese citizen. The social credit system w ­ ill influence the way in which citi-
zens of China can interact with governmental services—­including, but not
limited to, the judicial system.38 While ­there is currently no plan to deploy
this system onto a blockchain, it is easy to imagine how smart contracts could
be made to interact with this system, triggering the application of dif­fer­ent
rules and conditions depending on the score attributed to each individual.
Advances in data mining and profiling techniques could encourage and
accelerate the emergence of algocratic systems, governed by a set of rigid
and formalized code-­based rules—­which remain, nonetheless, inher-
ently dynamic and adaptive. If laws are incorporated into a technical
framework that dynamically evolves as new information is fed into the
system, and if t­ hese laws can be customized to the specificity of each in-
dividual interacting with the system, the dynamicity of t­ hese rules could
undercut princi­ples of universality (“all are equal before the law”) and
nondiscrimination.

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Code as Law 203

Lex Cryptographica and Algocratic Governance

When viewed as a w ­ hole, the use of blockchain technology as a regulatory

technology could provide a series of benefits to regulators and possibly also
to society at large. By relying on blockchain technology, governments could
regulate society more efficiently by reducing the costs of regulatory compli-
ance and law enforcement, automating laws, while si­mul­ta­neously reducing
the degree of uncertainty that is inherent in the ­legal prose. If ­these systems
­were to gain mainstream adoption and governmental support, they could
progressively contribute to the establishment of a new regulatory frame-
work—­one that increasingly relies on lex cryptographica and that consequently
enjoys the same properties as most of the code-­based systems described pre-
viously, including resiliency, tamper re­sis­tance, and autonomy.
With a blockchain, some laws and regulations can be translated, in ­whole
or in part, into a set of autonomous code-­based rules. ­Because rules trans-
lated in such a manner are executed automatically by the under­lying
blockchain-­based network, ­people ­will have less of a need to rely on a judge
to determine ­whether—­and how—­a par­tic­u­lar rule memorialized as a smart
contract should apply to any given situation. Given that the execution of
blockchain-­based rules does not require the intervention of any governmental
authority, the impact of ­these rules can only be reviewed, ­after the fact, by
a court or other judicial authority.
While this could bring impor­tant benefits in terms of efficiency and ­legal
certainty, the characteristics of lex cryptographica also create risk for individual
autonomy and society as a w ­ hole. When controlled by a centralized and
authoritative government, the distinctive characteristics of a blockchain—
in terms of resilience, tamper re­sis­tance, and automatic execution—­could
lead to situations where power­ful actors decide to incorporate their own set
of rules into a blockchain-­based system, so that anyone wishing to interact
with that system w ­ ill have no other choice but to abide by t­ hese rules. This
could ultimately help expand the power of rigid and authoritarian regimes,
which would gain a greater ability to control their citizens through a series
of self-­executing code-­based rules.
If blockchain technology w ­ ere to be effectively used in this manner, it
would significantly change the way in which laws are enforced t­oday. The
move from a bureaucratic paper-­based system to a technologically driven
code-­based system—­which precisely dictates the manner in which p ­ eople

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204 BLOCKCHAIN AND THE LAW

can interact with each other and with the world—­could constrain individual
be­hav­ior in ways that ­were not previously pos­si­ble, ultimately changing the
default rules and basic princi­ples of law enforcement.
­Today, governmental institutions are in charge of defining the rules that
society must abide by. Some are responsible for defining ­these rules, while
­others are responsible for enforcing them. In par­tic­u­lar, ­because laws are ap-
plied ex-­post, judicial bodies generally are assigned the responsibility of con-
struing and applying the law, deciding ­whether and when the law should
apply to any given situation.
Unlike existing laws, which are enforced a­ fter the fact, laws embodied
into code are automatically enforced via the under­lying technological frame-
work. Once l­egal or contractual rules have been memorialized as smart
contract code, the under­lying blockchain network ­will execute the code and
apply rules encoded therein exactly as planned—­without any possibility that
a government or other trusted authority ­will change or somehow influence
the execution of the code ­after it has been triggered. Only in the event of an
improper application of the law ­will an injured party have the ability to appeal
to a judiciary to undo the effect of t­ hese rules.
As more and more governmental ser­vices rely on a blockchain-­based in-
frastructure, we might eventually forgo the inefficiencies of existing bureau-
cratic systems and replace them with increasingly algocratic systems. ­These
represent new societal structures governed by lex cryptographica, whose rules
are both defined and enforced by autonomous software code, and where
­people are left with ­little to no recourse against an improper interpretation
or an unfair application of the law. If a government does not provide protec-
tive mechanisms, or chooses to disassemble t­ hese systems, the current regu-
latory framework governed by the rule of law may eventually be replaced by
a system of algorithmic governance, operated exclusively through the rule
of code.

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