Yes they can. It will be a relatively simple change in the code to divide satoshis to 16 decimal places instead of 8.

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I remember hearing that some software already uses smaller units than sats.

There's no reason why a person couldn't implement that change already. It doesn't violate the protocol rules in any way.

If you change the code, everything is possible. But that would not be Bitcoin anymore. I guess his question was on the current way Bitcoin works.

WITHOUT violating the protocol rules is the important part, which this doesn't.