Code is Law versus Contract is Law

“Code is Law” has been one of the slogans of the blockchain and cryptocurrency world. The core belief is that the intentions of the parties do not matter, and the only thing that matters is the actual software code that implements these intentions. Even if somebody finds a bug in the code, and exploits it to make money, “Code is Law” would regard this as a legitimate activity. The correct response to such a hack is to write better code in future.

Mainstream finance does not accept this idea. In 2022, Avi Eisenberg hacked Mango Markets, a decentralized finance (DeFi) trading platform on the Solana blockchain, and took out over $100 million. He claimed that he was an applied game theorist who had simply implemented a highly successful trading strategy that fully conformed to the rules of Mango Markets as embodied in their code (“Code is Law”). A jury did not buy this argument and convicted him for market manipulation in April this year. Courts obviously take into account the intentions of the parties.

Or do they? This week the Delaware Supreme Court affirmed the lower court’s ruling confirming an arbitration award that required the seller of a supermarket chain to pay the private equity buyers twice the purchase price. No that is not a typo. It was not the buyer paying the seller, but the seller paying the buyer, and that too twice the purchase price. The Chancery Court agreed that “the outcome that the Buyer achieved in this case was ... economically divorced from the intended transaction,” and the arbitrator also expressed a similar view. But Delaware law embraces strict contractarianism - “Contract is Law.” The arbitrator would not consider the intentions of the parties, and the courts would not step in either.

The US Justice Department and the CFTC prosecuted Essenberg for market manipulation. Should and would the Justice Department and the SEC prosecute the private equity buyers for market manipulation?

How is “Contract is Law” different from “Code is Law?” Do not the moral hazard argument work equally well in both cases? If “Contract is Law” encourages all parties to draft better contracts and read them more carefully, “Code is Law” encourages everyone to write better code and review them more carefully.

Posted at 2:18 pm IST on Thu, 14 Nov 2024         permanent link

Categories: blockchain and cryptocurrency, law, manipulation

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