What do you not want from a social bookmarking site? Everyone linking to information that it is technically illegal and could take your company down. And that’s exactly what Digg faces today.

When Digg took down a user’s post that contained a copyrighted series of codes designed to unlock the encryption on HD-DVDs, the Digg community revolted, posting the codes again and again. Last night, and this morning the Digg home page contained nothing but posts whose titles included the code.

Digg has backed down amid the protest, bowing to its users. Digg founder Kevin Rose admitted that Digg will no longer remove posts containing a banned HD-DVD cracking code: “You’d rather see Digg go down fighting than bow down to a bigger company. We hear you, and effective immediately we won’t delete stories or comments containing the code and will deal with whatever the consequences might be.”

Those consequences may well be significant legal action from the Motion Picture Association of America and Recording Industry Association of America.

The publicity is ultimately great for Digg – assuming it survives – and serves as a warning to media owners who decide to censor users, who can now talk back.