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The community-generated news site, Digg, has been an experimental hothouse for online communities. Last summer, there was the move by Netscape to offer to pay top Diggers to do their news-article bookmarking at Netscape, with Digg CEO Jay Adelson saying he’d never pay Digg community members. Now comes the user revolt after Digg decided to remove posts that mentioned the string of code used to crack HD-DVD technology. After users inundated the site with the code and related stories, Digg co-founder Kevin Rose said management was giving in to the community and would allow the code on the site.

Initially, Digg was responding to a takedown notice (similar to this one) from the Advanced Access Content System Licensing Administrator (AACS LA), which claimed the code could not be published online by rule of the Digital Millennium Copyright Act (DMCA). The string of code helps defeat digital rights management (DRM) features of the high-definition DVDs, allowing you to copy the content onto a computer or other device — though it’s not an easy task.

Digg decided that it would circumvent the law and its own Terms of Service with users to allow them to link to and publish the code on the site. That’s a powerful statement to make, and many people believe it’s foolhardy. The San Francisco Chronicle headlined its story as, User revolt at Digg.com shows risks of Web 2.0.

But in the long swath of history, Digg management — and its hardcore users — will end up in the right. For each piece of encryption software invented by the entertainment industry, a hacker will come along to circumvent it and publish the results to the world online. Some of those law-breakers will be punished, and yet, the cracked code itself will be let loose with little chance of litigating everyone into submission.

People have long shared recorded art, with no copy-protection or encryption schemes for LP records, cassette tapes, audio CDs or VHS tapes. Only in the digital age, with the ease of copying files and sharing them online, has the entertainment industry become obsessed with protecting their products — at the cost of alienating and suing their customers.

Wired’s Epicenter Blog has truly been the epicenter of reporting and aggregating information on this whole incident, and Wired News has showcased images and artwork users have created with the code. No word on what will happen to Wired and its owner Conde Nast for all these repeated showings of the code itself.

So what does the revolt prove? That mob rule will overthrow the rule of law on community news sites? Not in this case. The DMCA is a slippery slope toward a day when you can’t even post commentary about cracking DRM codes. According to the Electronic Frontier Foundation, in an excellent legal primer on the situation:

Is the key copyrightable? It doesn’t matter. The AACS-LA takedown letter is not claiming that the key is copyrightable, but rather that it is (or is a component of) a circumvention technology. The DMCA does not require that a circumvention technology be, itself, copyrightable to enjoy protection.

Digg should not allow its users to run rampant on the site and destroy it with spammed Diggs, cheats or hate speech. But there is a fine line when it comes to moderating a community. If you take a strong stand — even one that might be endorsed by your lawyers — you might also end up with no one left in your community. It’s important to strike a balance, and it will be interesting to see what legal ramifications, if any, come from Digg’s siding with its users.

But just as I argued earlier about Viacom’s $1 billion lawsuit against YouTube/Google, you can’t bottle up a piece of information, a piece of technology or an idea once it has spread so far and wide. After people made T-shirts, put up signs, and even sang a song with the code, it’s going to be impossible to put this technological genie back in the bottle.

What do you think? Should Digg side with its users in this case or comply with the cease-and-desist letter? Do you think all DRM is flawed or does it serve a worthy purpose? Share your thoughts in the comments below.