In a landmark ruling in 1999, the second highest court in the land, the Court of Appeal, ruled that code is speech and as such can not be subject to licensing requirements.
It is this case that fairly directly made possible current blockchain technology for it concerned legal prohibitions on the publication of cryptography. Cryptography that now secures the internet and of course the blockchain. Succinctly describing the facts, the Court of Appeal stated:
“Daniel J. Bernstein is currently a professor in the Department of Mathematics, Statistics, and Computer Science at the University of Illinois at Chicago.
As a doctoral candidate at the University of California, Berkeley, he developed an encryption method — ‘a zero-delay private-key stream encryptor based upon a one-way hash function’ — that he dubbed ‘Snuffle.’
Bernstein described his method in two ways: in a paper containing analysis and mathematical equations (the ‘Paper’) and in two computer programs written in ‘C,’ a high-level computer programming language (‘Source Code’).
Bernstein later wrote a set of instructions in English (the ‘Instructions’) explaining how to program a computer to encrypt and decrypt data utilizing a one-way hash function, essentially translating verbatim his Source Code into prose form.
Seeking to present his work on Snuffle within the academic and scientific communities, Bernstein asked the State Department whether he needed a license to publish Snuffle in any of its various forms.
The State Department responded that Snuffle was a munition under the International Traffic in Arms Regulations (‘ITAR’), and that Bernstein would need a license to ‘export’ the Paper, the Source Code, or the Instructions.
There followed a protracted and unproductive series of letter communications between Bernstein and the government, wherein Bernstein unsuccessfully attempted to determine the scope and application of the export regulations to Snuffle.
Bernstein ultimately filed this action, challenging the constitutionality of the ITAR regulations.”
The Electronic Frontier Foundation (EFF) played a key role in this case, funding Bernstein and assisting him with legal counsel.
A district court decision had been made in 1996, but it took three years for it to finally reach the Court of Appeal. Much time and much funds were thus required, but it was worth it as Bernstein is a hero of this age, as is EFF for the role it played. For the Court of Appeal ruled thus:
“‘Source code,’ at least as currently understood by computer programmers, refers to the text of a program written in a ‘high-level’ programming language, such as ‘PASCAL’ or ‘C’ [or Solidity].
The distinguishing feature of source code is that it is meant to be read and understood by humans and that it can be used to express an idea or a method. A computer, in fact, can make no direct use of source code until it has been translated (‘compiled’) into a ‘low-level’ or ‘machine’ language [bytecode], resulting in computer-executable ‘object code.’
That source code is meant for human eyes and understanding, however, does not mean that an untutored layperson can understand it. Because source code is destined for the maw of an automated, ruthlessly literal translator — the compiler — a programmer must follow stringent grammatical, syntactical, formatting, and punctuation conventions. As a result, only those trained in programming can easily understand source code…
Thus, cryptographers use source code to express their scientific ideas in much the same way that mathematicians use equations or economists use graphs. Of course, both mathematical equations and graphs are used in other fields for many purposes, not all of which are expressive. But mathematicians and economists have adopted these modes of expression in order to facilitate the precise and rigorous expression of complex scientific ideas. Similarly, the undisputed record here makes it clear that cryptographers utilize source code in the same fashion…
In light of these considerations, we conclude that encryption software, in its source code form and as employed by those in the field of cryptography, must be viewed as expressive for First Amendment purposes, and thus is entitled to the protections of the prior restraint doctrine…
The government maintains that source code is different from other forms of expression (such as blueprints, recipes, and ‘how-to’ manuals) because it can be used to control directly the operation of a computer without conveying information to the user. In the government’s view, by targeting this unique functional aspect of source code, rather than the content of the ideas that may be expressed therein, the export regulations manage to skirt entirely the concerns of the First Amendment. This argument is flawed for at least two reasons.
First, it is not at all obvious that the government’s view reflects a proper understanding of source code. As noted earlier, the distinguishing feature of source code is that it is meant to be read and understood by humans, and that it cannot be used to control directly the functioning of a computer. While source code, when properly prepared, can be easily compiled into object code by a user, ignoring the distinction between source and object code obscures the important fact that source code is not meant solely for the computer, but is rather written in a language intended also for human analysis and understanding.
Second, and more importantly, the government’s argument, distilled to its essence, suggests that even one drop of ‘direct functionality’ overwhelms any constitutional protections that expression might otherwise enjoy. This cannot be so. The distinction urged on us by the government would prove too much in this era of rapidly evolving computer capabilities.
The fact that computers will soon be able to respond directly to spoken commands, for example, should not confer on the government the unfettered power to impose prior restraints on speech in an effort to control its ‘functional’ aspects. The First Amendment is concerned with expression, and we reject the notion that the admixture of functionality necessarily puts expression beyond the protections of the Constitution…
We conclude that the challenged regulations allow the government to restrain speech indefinitely with no clear criteria for review. As a result, Bernstein and other scientists have been effectively chilled from engaging in valuable scientific expression.
Bernstein’s experience itself demonstrates the enormous uncertainty that exists over the scope of the regulations and the potential for the chilling of scientific expression.
In short, because the challenged regulations grant boundless discretion to government officials, and because they lack the required procedural protections set forth in Freedman, we find that they operate as an unconstitutional prior restraint on speech.”
There you have it in black and white, with no ambiguity nor any room for distinguishment. Source code is speech because it can be read by coders just as mathematicians can read formulas, and because it expresses ideas.
The freedom of expression is so important that it was given the very first amendment. The court has ruled that it extends to code. That means smart contracts, written in Solidity code, are likewise protected from any prior restrains, such as licensing requirements.
So far there has been no ruling by any US court of any seniority on whether Initial Coin Offerings (ICOs) or token sales are subject to the Securities Act 1933.
A criminal first instance case is in progress. There, the judge has left it to the American people to decide. A jury of 12 men and women will find as a matter of fact whether tokens are securities and thus subject to licensing requirements.
The free speech angle has not yet been argued in court. That may be because the Securities and Exchanges Commission (SEC) has so far been coy and in effect has cheated the public by dropping interpretations on matters that they intend to not actually prosecute.
The primary example is their legal interpretation of the Securities Act which concludes it applies to Decentralized Autonomous Organizations (DAOs).
This executive diktat left no method of challenging SEC’s interpretation in an adversarial court setting for they said they won’t be prosecuting anyone from the Slockit DAO.
A court of law may very easily reach a very different conclusion, even without invoking first amendment rights which easily can apply in a DAO setting for that was one of the most beautiful and innovative expression of an idea.
Likewise SEC is now telling the public that a decentralized exchange (dex), and thus by extension other dexs, need to comply with the Securities Act, so requiring a license.
This diktat is again done in a way that bypasses the judiciary, and thus bypasses the rule of law, for SEC has settled with the founder of EtherDelta, the dex. Meaning the two parties have effectively reached a private semi-contractual agreement that practically has or can have nothing to do with the law.
This behavior in a free country is worrying for the SEC has no power to make law (congress does) nor any right to interpret it (judges do), yet has been doing both.
There are ways of holding them accountable. This space may now need to utilize the constitutional protection provided by an impartial and independent judiciary.
First instance judges are hit and miss as they are sort of entry level “employees.” With each appeal, the more reasonable are the judges with their decisions often very difficult, but usually quite balanced.
The problem is that it takes years for a Court of Appeal ruling and slightly longer for a Supreme Court ruling. In such a fast moving space where Facebook was a bedroom start-up just a few years ago and now is a corporate giant, years are more like decades or even centuries.
So practically it might not even matter what the Court of Appeal ends up ruling, although the decision detailed above did matter and did matter greatly for it made possible this entire space.
That decision, however, was due to the internet space taking the initiative. So far, we have allowed SEC to effectively cheat. The agency is going around making law through decisions designed to bypass the judiciary or designed to delay a judicial decision.
Furthermore, there is a great disbalance because SEC can choose what case is brought forth. A jury or a judge might decide differently in a case that involves a complete scammer, and differently in a case that involves a professor engaging in scientific endeavors.
Just like SEC, however, this space can also choose what case it brings forward by suing SEC for the breach of first amendment rights as well as other legal matters, like haphazardly making law and for retroactively applying their own interpretation.
The difficulty of course is that it may be easier for an entrepreneur to go to a friendly jurisdiction, rather than engage in a legal battle. Just as there is a commons problem because this space hasn’t managed yet to create a crypto EFF like organization that can take cases forward in the public interest.
Had such organization been around, Zachary Coburn, the founder of EtherDelta, may well have not settled. Without it, he probably had no choice.
Moreover, many may find it easier to engage law makers, but this space may well need to engage the legal system, in addition to the political system, for smart contract code is speech, and speech is protected from any restrains by SEC or any other government agency that requires permission or a license for code to be published.