What Are Digital Assets? Digital assets are assets issued and transferred using distributed ledger or blockchain technology. They are often referred to as crypto-asset , digital token , or cryptocurrenc y , among other terminology. Digital assets can be securities, currencies, or commodities. Although market participants use different terms to describe them, financial regulators have stated thatâregardless of what they are calledâfinancial activities, services, and market participants must adhere to applicable laws and regulations. In the case of digital assets, depending on their characteristics, this can include securities laws and regulations. One key difference between digital and traditional assets is an asset's ownership and exchanges of ownership. Whereas traditional assets are generally recorded in private ledgers maintained by central intermediaries, digital assets' ownership and exchange are generally recorded on a decentralized digital ledger. Digital Assets as Securities The Securities and Exchange Commission (SEC) is the primary regulator overseeing securities offers, sales, and investment activities, including those involving digital assets. However, not all digital assets are securities. In general, a security is "the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others." When a digital asset meets the criteria defining a security, it would be subject to securities regulation. For example, most of the initial coin offerings (ICOs) are securities, but Bitcoin is not a security, mainly because it does not have a central third-party common enterprise. Market intermediaries (e.g., investment advisers, trading platforms, and custodians) involved with digital asset investment, trading, and safekeeping could also be subject to relevant securities regulation. Securities regulations could apply if the intermediaries are directly engaged in the security-based digital asset transactions or if they use digital assets (including non-security-based digital assets) to facilitate securities transactions. This report focuses on digital assets and activities that are subject to securities regulation. It discusses the objectives and policy rationale of securities laws and regulations; SEC initiatives to address specific regulatory challenges arising from certain unique digital asset features that raise questions concerning the adequacy of the existing regulatory framework; and policy issues for congressional and industry consideration in five selected areas: initial coin offerings, stablecoins, digital asset exchange-traded funds, digital asset custody, and digital asset trading. Securities Regulation Background Securities regulation generally applies to all securities and related intermediaries, whether they are digital or traditional. This section broadly discusses the objectives and policy rationale behind securities laws and regulations. Congress established the SEC and the main framework for capital markets and securities regulation to restore market confidence after the stock market crash of 1929. The regulatory framework's key objectives are to promote disclosure of important market-related information, maintain fair dealing, and protect against fraud. As a result, the existing securities regulatory regime focuses on disclosure-based rules, an antifraud regime, and rules governing securities market participants (e.g., exchanges, broker-dealers, and investment advisors). The SEC's mission is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation. For example, one of the cornerstones of securities regulationâthe Securities Act of 1933âis often referred to as the "truth in securities" law. As the phrase suggests, disclosures allow investors to make informed judgments about whether to purchase specific securities by ensuring they receive financial and other significant information on securities offered for sale. The SEC does not make investment recommendations. The disclosure-based regulatory philosophy is consistent with Supreme Court Justice Louis Brandeis's famous dictum that "sunlight is said to be the best of disinfectants; electric light the most efficient policeman." The current developments in digital asset trading and fundraising are not the first time securities regulators have had to accommodate new technology. Capital markets infrastructure has experienced continuous innovation since the securities regulatory framework was first formed in the 1930s. For example, securities trading platforms experienced a major revolution in the late 1960s and early 1970s, when trading processes shifted from paper and pen-based manual settlements in isolated markets to electronic platforms, which incorporate new data-processing and communications technologies that link all markets together. Congress responded to these advancements by amending Section 11A of the Securities Exchange Act to establish a national market system. The congressional objectives were to encourage efficient, competitive, fair, and orderly markets that are in the public interest and protect investors. The SEC's Current Regulatory Approach Although digital assets as a capital market innovation evolved quickly, the SEC to date has not been active in promulgating new digital-asset-specific rules. One rationale for this approach is that, because it is uncertain how the characteristics and use of digital assets will evolve, highly prescriptive regulations could become obsolete, and potentially inefficient. The SEC's current regulatory framework that governs traditional and digital securities include the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Company Act of 1940, and the Investment Advisers Act of 1940. It has also used existing tools and a number of initiatives besides rulemaking to address specific regulatory issues arising from certain unique digital asset features. The SEC's approaches include the following: Innovation office . The SEC created the Strategic Hub for Innovation and Financial Technology (FinHub) in 2018 to engage in financial technology ( fintech ), consolidate and clarify communications, and inform policy research. In 2019, FinHub conducted outreach meetings in multiple cities and published a framework for analyzing whether a digital asset is a security. Enforcement . The SEC has brought enforcement actions against securities token issuers and digital asset traders and asset managers, among others. The SEC established a new Cyber Unit and increased its monitoring of and enforcement actions against illicit cyber-based transactions. No-action letter s . The SEC uses no-action letters to provide relief for digital-asset-related businesses and to signal its regulatory intentions to capital markets. For example, the SEC issued a no-action letter to TurnKey Jet, a business-travel startup, stating that its issued tokens are not securities. This was the SEC's first no-action letter for an ICO. The letter triggered a wave of industry discussions and could set a precedent for future digital asset activities. Solicitation for public input . The SEC released a letter to the industry in March 2019 to solicit public input regarding digital asset custody. The comments may help the SEC understand the challenges the industry faces and assess investor-protection risks. New product approval . The SEC could approve or reject new digital asset products. For example, the SEC has reviewed Bitcoin ETF proposals in recent years and has consistently rejected such proposals as of 2019. Issues Raised by Digital Assets in the Securities Regulation Context Digital assets and their use in capital markets are a growing presence in the financial services industry's development. They raise policy questions, including whether new digital-asset-related practices have outgrown or are sufficiently overseen by the existing regulatory system; how the regulatory frameworks can achieve a level playing field where the same businesses and risks could be subject to the same regulation; and how to protect investors without hindering innovation. A fundamental understanding of innovative trends and the appropriate timing of the related policy actions are also important for digital asset regulation. In analyzing technological changes, some commentators suggest that society tends to overestimate a technology's effects in the short run and underestimate its effects in the long run. This illustrates the delicate balance between social pressure for change and the appropriate timing for policy responses in the face of innovation. This section explains key examples of digital asset developments and use cases, focusing on policy issues and legislative proposals in the securities regulation context. The most salient digital asset-related policy issues include regulatory oversight and investor protection. Regulatory O versight . Digital asset issuers and investors face a steep learning curve in comprehending the regulatory landscape and determining how or if securities laws apply to them. It may not always be clear whether a digital asset is a security subject to SEC regulation. Multiple agencies apply different regulatory approaches to digital assets at the federal and state levels. For example, for certain digital assets, the SEC treats them as "securities," the Commodity Futures Trading Commission treats them as "commodities," and the Internal Revenue Service treats them as "property." State regulators oversee digital assets through state money transfer laws, and the Treasury Department's Financial Crimes Enforcement Network monitors digital assets for anti-money laundering purposes. Investor Protection. Digital asset investorsâwhich may include less-sophisticated retail investors, who may not be positioned to comprehend or tolerate high risksâmay be especially vulnerable to new types of fraud and manipulation, leading to questions about investor protection. First, there appears to be high levels of scams and business failures. A 2018 study from Satis Group, a digital asset advisory firm, found that 81% of ICOs were scams and another 11% failed for operational reasons. Second, many digital asset companies offering securities do not comply with SEC registration and disclosure obligations, potentially affecting investors' ability to understand their risk exposures. Third, the high volatility of digital assets' valuations can potentially result in large gains and losses, the risk of which may not be well understood by less-sophisticated investors. Lastly, digital assets operate outside the traditional financial system and thus may not offer common types of transaction protectio ns. For example, banks may have the option to halt or reverse suspicious transactions and associate transactions with the users' identities, but a digital asset transaction is generally irreversible through such intermediaries. Initial Coin Offerings Businesses raise funding from capital markets through securities offerings, such as stocks, bonds, and digital assets. ICOs are a new fundraising mechanism in which projects sell their digital tokens in exchange for fiat currency (e.g., dollars) or cryptocurrency (e.g., Bitcoin). A typical ICO transaction involves the issuer selling new digital "coins" or "crypto tokens" to individual or institutional investors. Investors pay for these tokens with either cryptocurrencies or traditional currencies. ICOs are often compared with initial public offerings (IPOs) of the traditional financial world because both are methods by which companies acquire funding. The main difference is that ICO investors receive digital assets in the form of virtual tokens or the promise of future tokens, unlike IPO investors who receive an equity stake representing company ownership. These coins or tokens are new digital currencies each company creates and sells to the public. Coin purchasers could redeem the coins for goods or services from crypto enterprises or hold them as investments hoping the coins would increase in value. Although every crypto enterprise is different, they generally make transfers without an intermediary or any geographic limitation. Industry practitioners are increasingly using the term security token offering s (STOs) to describe ICOs. This change of terminology reflects the industry's acceptance that many ICOs are securities offerings and thus subject to securities laws and regulations. Securities laws require all securities offers and sales to either be registered under their provisions (as a public offering) or qualify for an exemption from registration (as a private offering). ICOs can take many forms. They can be listed on national exchanges as public offerings or be issued pursuant to the private securities offering exemptions. Operational and regulatory conditionsâincluding investor access, maximum offering amounts, and filing requirementsâdiffer depending on the type of offering an ICO selects. Table 1 illustrates examples of ICO fundraising options. ICOs could potentially use all the existing securities offering venues. They have already reportedly been issued under several of the private exemptions (e.g., Regulation D, Regulation Crowdfunding, and Regulation A). Although public offering ICOs are possible, as of year-end 2019, no ICOs have yet issued under this method. The previously discussed policy issues relating to regulatory oversight and investor protection also apply to ICOs. Digital Asset "Exchanges" About 300 platforms are offering digital asset trading and referring to themselves as "exchanges," as of December 2019. A platform that offers trading in digital asset securities and operates as an "exchange" (as defined in the federal securities laws) must register with the SEC as a national securities exchange or obtain exemption. However, many such platforms are registered as money-transmission services (MTSs) instead of SEC-regulated national securities exchanges. MTSs are money transfer or payment operations that are mainly subject to state, rather than federal, regulations. Because MTS regulations were not designed with digital asset trading activities in mind, some argue that they are insufficient in regulating the transfer of digital assets. In addition, these services raise investor-protection concerns because they are not subject to the more rigorous oversight as national securities exchanges. The SEC issued a statement in 2018 clarifying that the online platforms for buying and selling digital assets that qualify as securities could be unlawful. These digital asset trading platforms face problems with fraud and manipulation. Some think applying SEC regulation would help, but others are concerned that regulation could stifle financial innovation. Digital Asset "Exchanges" Versus National Securities Exchanges Although current technological advancements may seem to have blurred the terminology used, certain platforms trading digital assets that are securities appear to behave as functional equivalents to national securities exchanges. For example, these platforms bring together buyers and sellers, execute trades, and display prices. However, there are differences, such as the blockchain-enabled trading platforms operating without a central database and the fact that not all digital assets trading on platforms are securities. The general consensus among domestic and international securities regulators regarding digital assets is that regulatory oversight should be balanced with the need to foster financial innovation. However, if digital asset trading platforms are buying and selling securities and fall within the SEC's regulatory regime, then securities regulation's basic objectives should arguably continue to apply. In addition, some international authorities believe that, although digital asset trading platforms may face issues similar to traditional exchanges, regulatory approaches may still need to be adjusted to account for particular operating models that may amplify risks differently. In general, policymakers contending with major financial innovations have historically focused on addressing risk concerns while tailoring their regulatory framework flexibly to accommodate evolving technology. The differences between digital asset "exchanges" and the SEC regulated national securities exchanges could include transparency, fairness, and efficiency. These are principles guiding the national securities exchange regulation, yet they are perceived as lacking for digital asset "exchanges." Many digital asset "exchanges" are reportedly exaggerating their volumes on a routine basis to attract more participation. Investors are perceived to have no idea whether the trading volume and prices reflect real activities or market manipulation. To take the more frequently studied digital asset Bitcoin for example, one study shows that 95% of Bitcoin's trading volume displayed on digital asset price and volume aggregator CoinMarketCap.com is either fake or non-economic in nature. Another widely cited academic study illustrates the scale of potential damage that digital asset market manipulations could create, underlining the investor-protection concerns in the digital asset space. The study argues that a single market manipulator likely fueled half of Bitcoin's 2017 price surge that pushed its price close to $20,000. The activities were reportedly carried out through the largest digital asset "exchange" at that time, Bitfinex, and used a stablecoin called Tether to boost the demand for Bitcoin. For this alleged manipulation, Bitfinex and Tether faced a class complaint seeking a total of $1.4 trillion in damages. Although Bitfinex and Tether rebutted the study, calling it "bogus," they are currently under investigation by federal and state regulators. Given the scale of such issues, some have questioned whether digital asset trading warrants more regulatory safeguards that protect investors and promote more efficient market operations. It is difficult to predict the extent to which an SEC-regulated digital asset national exchange would have mitigated the market manipulations, or if the SEC's regulatory framework is the best fit for addressing all the digital-asset-trading-related policy concerns. Still, digital asset "exchanges" under the current operating environment appear vulnerable to misconduct. The Bitcoin price manipulation study's author, a finance professor with a background in forensics, said that "years from now, people will be surprised to learn investors handed over billions to people they didn't know and who faced little oversight." Current State of Play The SEC took its first enforcement action against an unregistered digital asset "exchange" in 2018. The SEC stated that the platform "had both the user interface and underlying functionality ofÂ an online national securities exchange and was required to register with the SEC or qualify for an exemption,"Â but was perceived to have failed to do so. Some of the largest digital asset "exchanges" have developed a system to rate digital assets based on the probability that they could be defined as securities. These "exchanges" reportedly hope that by so doing they could exclude securities-based digital assets from their unregistered trading platforms, thus circumventing SEC securities regulation. This action is part of the digital asset industry's self-regulation discussion that is gaining momentum. For example, an international law firm's 2018 survey showed that the vast majority of the respondents thought the industry should formalize self-regulation and subject that self-regulation to regulatory oversight. Many digital asset trading platforms also reportedly sought to obtain exemptions from the SEC to operate as alternative trading systems (ATS). ATSs are "dark pools" that do not publicly display the size and price of their orders. ATSs face fewer regulatory requirements than national exchanges, but they must register as broker-dealers and meet certain SEC and Financial Industry Regulatory Authority (FINRA) compliance and filing requirements, such as custody, books and records, and regulatory examinations. However, any ATS that transacts more than 5% of the trading volume of any security, which also trade on the national securities exchange system, could face stricter "order display" and "first access" rules that effectively integrate that ATS in part into the national market system. A number of the largest digital asset "exchanges" (e.g., Coinbase, Gemini, Bitstamp, and ItBit) have obtained state-level regulatory licenses (BitLicense) from New York State's Department of Financial Services. The license requirements include certain investor protection, market fraud and manipulation prevention, and illicit activity prevention measures. Digital Asset Custody Custodians provide safekeeping of financial assets. They are financial institutions that do not have legal ownership of assets but are tasked with holding and securing assets, among other administrative functions. The SEC's custody rules impose requirements designed to protect client assets from the possibility of being lost or misappropriated. Custodians are important building blocks for the financial services industry. The custody industry for traditional assets is large and concentrated. In the past 90 years, financial custody has evolved from a system of self-custody to one in which major custodians provide asset custody for client accounts. Today, four banks (BNY Mellon, J.P. Morgan, State Street, and Citigroup) service around $114 trillion of global assets under custody. Digital-asset custody has recently attracted regulatory attention because the SEC custody rules could pose unique challenges for custodians of digital assets. The custody rules were developed for traditional assets, which are easier than digital assets to secure and produce tangible tracks of physical existence or records. Digital assets generally lack physical existence or records produced by intermediaries, as seen in traditional assets such as gold or bank accounts. Common practice in the digital asset industry so far focuses on safeguarding private keys, unique numbers assigned mathematically to digital asset transactions to confirm asset ownership. This practice raises the question of how possession or control of a digital asset should be defined for regulatory purposes. The challenges include but are not limited to, for example, that a digital asset could have multiple private keys or that a single private key does not exist. As such, some believe the digital asset custody definition should go beyond the verification of the keys to incorporate holistic custody views. Regulators are currently evaluating whether custody requirements should be adjusted to account for digital assets' unique operational characteristics. The SEC released a letter to the industry in March 2019 to solicit public input regarding digital asset custody. The SEC summarized a number of policy issues, including the use of distributed ledger technology (DLT) to record ownership, the use of public and private cryptographic key pairings to transfer digital assets, the ability to restore or recover digital assets once lost, the generally anonymous nature of DLT transactions, and the challenges posed to auditors in examining DLT and digital assets. On July 8, 2019, the SEC and FINRA, a self-regulatory organization, issued aÂ joint statement to outline considerations for digital asset securities custody. They acknowledged the challenges of applying custody requirements to digital assets and stated that there are initiatives underway to solicit input from market participants that could help develop new ways to establish "possession or control" for digital asset securities. Digital Asset Exchange-Traded Funds ETFs are pooled investment vehicles that gather and invest money from a variety of investors. ETFs combine features of both mutual funds and stocks and can trade on national exchanges. Some industry practitioners hope that the ETF structure could incorporate digital assets. Individual investors typically buy digital assets, for example, Bitcoins, from other owners or through digital asset trading platforms and other intermediaries. Individual investors currently cannot directly purchase digital assets (e.g., Bitcoins) from the SEC-regulated national securities exchanges. Some have proposed allowing retail investors to buy or sell digital assets on regulated exchanges through the exchange-traded fund (ETF) structureâwhere, instead of directly trading digital assets, the investors would buy or sell publicly traded ETF shares with values linked to underlying digital assets. This section discusses potential Bitcoin ETFs' policy implications for the digital asset industry. Bitcoin ETF Proposals As mentioned previously, some digital assets are securities subject to securities laws and regulations. But digital assets could also be structured as securities products, even if the underlying assets are not securities. The proposed Bitcoin ETFs are the most prominent example. Although Bitcoin is not a security, Bitcoin ETFs would be securities products with value linked to the underlying Bitcoins and are subject to securities regulation, including the Investment Company Act of 1940 and Investment Advisers Act of 1940. The digital asset industry has submitted many Bitcoin ETF proposals with the hope of gaining access to more retail investors, but, as of the end of 2019, the SEC has not approved a Bitcoin ETF. The SEC repeatedly stated in its rejections that Bitcoin ETF proposals did not meet standards governing national securities exchanges. Specifically, the SEC stated that the proposals have not met the requirements in Section 6(b)(5) of the Exchange Act that order national exchanges to be "designed to prevent fraudulent and manipulative acts and practices." The agency articulated its rationale in a 2018 staff letter that listed challenges related to a Bitcoin ETF. In addition to market manipulation concerns, major Bitcoin ETF challenges included valuation and pricing, custody, and liquidity. For example, all ETFs must frequently value their portfolio assets. The valuation process determines what investors should pay for the ETF shares and how the ETFs perform. Some worry that the Bitcoin ETFs would not be able to obtain the information necessary to adequately value the digital assets given the high volatility and fragmentation of the markets. Bitcoin ETFs also have supporters. One institutional investor argues that ETFs provide a familiar and convenient way for investors to invest in digital assets, enabling them to participate in digital asset trading and partake in the potential financial gains brought by technological advancements, despite the potential trade-offs with respect to investor protection. In a public statement about a dissenting vote on a disapproved Bitcoin ETF proposal, SEC Commissioner Hester Peirce stated that certain Bitcoin ETF proposals do satisfy the Section 6(b)(5) statutory requirements and that the disapproval may dampen innovation and inhibit institutionalization. Stablecoins in Securities Markets Stablecoins are a type of digital asset designed to maintain a stable value by linking its value to another asset or a basket of assets, typically collateralized by fiat currencies or facilitated by algorithms. The best-known example of a proposed stablecoin is Facebook's Libra proposal (see discussion below). Since it was first announced in mid-2019, Libra has generated many policy concerns, inspired new considerations for comparable use cases from the private and public sectors, and fueled discussions of other global stablecoins. A stablecoin arrangement's individual components are complex, leading to many crosscutting policy discussions. The Financial Stability Board, an international financial authority, characterizes a stablecoin's components as the following: Entities/structures involved in issuing stablecoins; entities/structures that manage assets linked to the coins; infrastructure for transferring coins; market participants/structures facing users (e.g., platforms/exchanges, wallet providers) and the governance structure for the arrangement, including the role and responsibilities of a possible governance body and the underlying stabilisation mechanism used for the stablecoin. Stablecoin-related policy concerns vary; they include, market integrity, investor protection, financial stability, monetary policy, payments, and illicit activity prevention. Some of these concerns are outside of the scope of this report, which focuses on securities regulation. In addition to securities regulators, other regulatory authoritiesâcentral banks, payment system regulators, and financial crime enforcement entitiesâhave been involved in stablecoin monitoring and oversight. Facebook's Libra Proposal Facebook's planned stablecoin Libra attracted congressional attention after it was announced on June 18, 2019. At related congressional hearings, Facebook received multiple questions regarding whether Libra is an ETF and how it should be regulated. These questions arose because to create the stablecoin, Libra would be backed by reserve assets, including bank deposits and short-term government securities. New Libra tokens could only be created or destroyed by authorized sellers. Some industry practitioners argue that Libra's proposed operational structure is similar to the creation and redemption process used by ETFs. Facebook acknowledged at the House hearing that Libra uses operational mechanisms that are similar to ETFs, but stated its view that it is still a payment tool and not an investment vehicle. If deemed an ETF, Libra must comply with the SEC's regulatory regime governing securities, investment advisors, and investment companies. SEC approval would be required to launch the project. The SEC is reportedly evaluating whether Libra's structure makes it an ETF. Stablecoin-Related Legislative Proposals The House Financial Services committee discussed three stablecoin-related securities proposals at an October 2019 House Committee on Financial Services hearing. The Managed Stablecoins are Securities Act of 2019 ( H.R. 5197 ) proposes to subject stablecoins to securities regulation by amending the statutory definition of the term security to include a new category of securities called "managed stablecoins." The bill would define a managed stablecoin as a digital asset that has either (1) a market value that is determined, in whole or significant part, by reference to the value of a pool or basket of assets that are held, designated, or managed by one or more persons; or (2) holders that are entitled to obtain payment which is determined, in whole or in significant part, on the basis of the value of a pool or basket of assets held, designated, or managed by one or more persons. Because managed stablecoin issuers are generally perceived as not acknowledging their stablecoins as securities, this bill would remove regulatory uncertainty by stating that a managed stablecoin is a security and therefore subject to securities regulation. The second legislative proposal would limit public company executives' ability to own managed stablecoins. This draft proposal incorporates the same "managed stablecoins" definition, but would take a slightly different approach by delisting a public company if its directors and executives either (1) received compensation in managed stablecoin; (2) bought or sold a managed stablecoin; or (3) were affiliated with a person who bought or sold a managed stablecoin after the date of the security's registration. Lastly, the Keep Big Tech Out of Finance Act ( H.R. 4813 ) would prevent large technology firms like Facebook from offering certain financial services or issuing digital assets.


What Laws Regulate the Treatment of the U.S. Flag? The federal law regulating flags ("flag code") sets forth guidelines for private citizens on the appearance and display of the U.S. flag ("flag"). The flag code also specifies how to deliver the Pledge of Allegiance to the flag and appropriate conduct while watching a performance of the National Anthem. Most of the flag code contains no explicit enforcement mechanisms, and relevant case law would suggest that provisions without enforcement mechanisms are declaratory and advisory only. Efforts by states to punish either verbal flag disparagement or disrespectful flag display ("flag-misuse laws") have been struck down under First Amendment free speech precepts that apply to the states through the Due Process Clause of the Fourteenth Amendment. Federal law and many state laws also provide penalties for physical mistreatment of the flag ("flag-desecration" laws), although application of these laws would generally violate the U.S. Constitution. For instance, the federal Flag Protection Act, which criminalizes flag desecration, was struck down on First Amendment free speech grounds as prohibiting symbolic speech. Some federal and state flag-misuse laws also prohibit placing advertising images on the U.S. flag or displaying the U.S. flag on merchandise; these laws may also be vulnerable to free speech challenges, although the Supreme Court has reserved this question. Finally, there are mandatory state requirements directing the daily recital of the Pledge of Allegiance by teachers that have been upheld against Establishment Clause challenges, although a requirement that students participate in such recitation was struck down as a violation of free speech. What Are the Voluntary Guidelines for How U.S. Flags Are Displayed? The flag code provides detailed guidelines for the appearance and display of the flag. The flag is to contain thirteen horizontal stripes, alternating red and white, and the union of the flag (the blue field) is to contain one star for each state. Flags are displayed from sunrise to sunset; however, a properly illuminated flag may be displayed at night. The flag should be hoisted briskly and lowered ceremoniously and should not be displayed during days of inclement weather unless an all-weather flag is used. The flag should be displayed daily on or near the main building of every public institution, in or near polling places on election day, and in or near schools on school days. There are guidelines for when a flag is used in a procession, displayed on a float or motorcar, displayed with other flags, or displayed from a flagpole. There are also detailed guidelines for when and how flags are to be displayed at half-staff. There are guidelines for when a flag is used to cover a casket and for when a flag is suspended across a building corridor or lobby. There is a description of the appropriate conduct of persons during the hoisting, lowering, and passing of the flag, and there are directions for how a flag is not to be treated. Finally, the President can modify the flag display requirements of the flag code. Can Prohibitions on Flag Misuse or Desecration Be Enforced? The Supreme Court has repeatedly struck down the application of flag improper use or desecration laws on free speech grounds. In Street v. New York , the Court considered a challenge to a law that made it a misdemeanor to "publicly mutilate, deface, defile, or defy, trample upon, or cast contempt upon either by words or act [any flag of the United States]." In Street , the defendant, learning of the shooting of civil rights activist James Meredith, burned a flag on a Brooklyn street corner while stating "Yes; that is my flag; I burned it. If they let that happen to Meredith, we don't need an American flag." The Court in Stree t first concluded that the trial record did not establish whether the defendant's conviction had been for burning the flag or for the accompanying words, so it considered either as possible grounds for the conviction. The Court evaluated the purported governmental interest in punishing the defendant's words, rejecting the argument that the government's intent was to deter the incitement of unlawful acts. The Court next held that the speech in question was not "fighting words," i.e., words so inherently inflammatory that they were "likely to provoke the average person to retaliations, and thereby cause a breach of the peace." Nor, the Court concluded, was the statute narrowly drawn to punish only words of that character. Further, the Court dismissed the argument that government interests in avoiding "shocking" or disrespectful speech outweighed the freedom to express one's opinions about the flag. Finally, the Court concluded that freedom of speech protected public expression of opinions about the flag, even if such opinions are defiant or contemptuous. Because it had sufficient basis to overrule the conviction based on the spoken words alone, the Court declined to pass upon the validity of the New York law as applied to the flag burning. In the subsequent flag-misuse case of Spence v. Washington , a college student was convicted under a Washington State improper use law for affixing a peace symbol made of removable tape to a U.S. flag and hanging the flag upside down from an apartment window. The defendant testified that he had put the peace symbol on the flag as a protest against the Cambodian invasion and the killing of students at Kent State University during anti-war protests. The Court held that the student's act was symbolic speech, an activity imbued with communication. The Court also held there were no facts to support a breach of the peace, nor was there a valid governmental interest in avoiding offensive speech. The Court concluded that the flag had not been damaged by the removable tape, so maintaining the physical integrity of the flag was not at issue. Thus, the Court concluded that no governmental interest existed to support the conviction within the contours of the First Amendment. In Texas v. Johnson , a political demonstration participant at the 1984 Republican National Convention in Dallas was convicted of burning a flag in front of Dallas City Hall. He was convicted under a Texas statute that prohibited the desecration of a venerated object, sentenced to a year in jail, and fined $2000. Texas conceded that the flag burning was expressive conduct, but argued that there was sufficient governmental interest in such prohibition. The Court rejected the argument that the law was designed to prevent breaches of the peace, noting that no such breach occurred in this case and that Texas had not shown that every flag-burning was "directed to inciting or producing imminent lawless action and is likely to incite or produce such action." Further, Texas already had a statute that prohibited breaches of the peace. The Court in Johnson also held that Texas's assertion that the law was needed to preserve the flag as a symbol of nationhood and national unity only showed that the law was targeting expression, not conduct. Further, the law's application only to severe acts of physical abuse against the flag that were likely to be offensive made clear that the restriction was content-based. The Court found Texas's expressed interestâthat flag-burning casts doubts on the meaning of the flag as a national symbolâcould not be justified because society found the burning offensive or disagreeable. Thus, the defendant's conviction was held to violate the First Amendment. In response to the Johnson decision, Congress enacted the Flag Protection Act of 1989. Two separate groups of protestors were prosecuted for flag burning under this act, and their cases were considered by the Supreme Court in U nited S tates v. Eichman . As the government in Eichman conceded that the defendant's conduct was expressive, the Court limited its decision to whether the Flag Protection Act was constitutionally distinct from the Texas statute in Johnson . The government contended the Flag Protection Act did not target expressive conduct, but was intended to protect the physical integrity of the flag in order to safeguard the flag's identity "as the unique and unalloyed symbol of the Nation." It argued that, unlike the Texas statute in Johnson that prohibited only flag desecration "that seriously offend[s]" onlookers, the act's prohibitions were not based on motive, intended message, or the likely effects of the conduct on onlookers. The Court, however, held that the mere destruction of a U.S. flag did not affect the significance of the flag as a symbol of national unity unless that destruction was done with the intent to communicate a message. Further, the language of the actâwhich prohibits mutilating, defacing, defiling or trampling upon a flagâconnotes disrespectful treatment of a flag in order to damage the flag's symbolic value, and the exception for disposal of "worn or soiled" flags exempts acts traditionally associated with patriotic respect for the flag. Thus, the Court held that the act was a regulation of expressive activity and, consistent with its decision in Johnson , struck it down. Resolutions were introduced in the 115th Congress proposing a constitutional amendment to authorize Congress to prohibit physical desecration of the flag, but no similar resolutions have been introduced in the 116th Congress thus far. Can a U.S. Flag Be Used for Advertising? Flag-misuse laws sometimes include a prohibition on the use of the U.S. flag for certain forms of commercial speech such as advertising. Commercial speech, however, has fewer constitutional protections than other forms of speech. The Supreme Court considers speech commercial when: (1) it is contained in an advertisement; (2) refers to a specific product or service; and (3) the speaker has an economic motivation for making it. The Court in Eichman , when striking down the Flag Protection Act, noted that its opinion did not extend to prohibitions on the commercial exploitation of the U.S. flag. Thus, the question remains whether prohibitions on the use of flags for advertising purposes violates the First Amendment. It does not appear that any court has directly addressed whether the use of a U.S. flag in advertising is commercial speech. One difficulty in analyzing this issue is that the display of a flag in advertising appears to add little expressive content to the commercial aspects of the advertisement. In other words, while a U.S. flag may be used in an advertisement and its use may be economically motivated (fulfilling the first and third criteria for commercial speech), the display of a flag is unlikely to convey information about the specific product or service. Rather, the expressive content of displaying the flag would appear to be to link the product or service to a political message such as patriotism or national pride. To the extent that the display of the flag in an advertisement communicated an idea such as patriotism, then it might not even be treated as commercial speech but would be analyzed as expressive conduct. Even if advertising using a flag was evaluated as commercial speech, the statute prohibiting it might still be found to violate free speech, as commercial speech does retain some free speech protections. In Central Hudson Gas & Elec. v. Public S ervice Comm ission , the Court considered whether the Public Service Commission of the State of New York could order electric utilities in New York State to cease advertising promoting electricity use. The Court noted a "common sense" distinction between speech proposing commercial transactions that occurs in an area traditionally subject to government regulation and other varieties of speech. Consequently, the Court applied a four-part analysis for commercial speech. First, for commercial speech to be protected, it must concern lawful activity and not be misleading. Next, there must be a substantial government interest in its regulation. If both inquiries yield positive answers, the Court must determine whether the regulation directly advances the governmental interest asserted and whether it is "narrowly drawn" to be no more extensive than necessary to serve that interest. In Central Hudson , the Court held that New York's interest in reducing inequities in the regulated electricity market that would be caused by increased energy consumption was substantial, as was the government's energy conservation interest. The Court went on to hold, however, that it was speculative whether the governmental interest in avoiding inequities would be served, and that this interest was only served if other factors that affected electricity rates remained constant. The Court did find that the State's interest in energy conservation was substantial and that the parties did not dispute that advertising would increase sales. The Court, however, struck down the advertising ban as not narrowly drawn to that interest, in that it prohibited not only advertising that would increase energy use but also advertising that would have an energy neutral effect or would lead to a net decrease in energy consumption. It should be noted that, despite the more limited protection afforded commercial speech, the Supreme Court has not upheld governmental suppression of truthful commercial speech in more than twenty years. Further, several post- Central Hudson cases seem to afford more protection to commercial speech than originally contemplated by the case. For instance, in City of Cincinnati v. Discovery Network, Inc. , the Court, considering a City of Cincinnati regulation banning commercial publications from public newsracks, rejected the "bare assertion that the 'low value' of commercial speech is a sufficient justification for [a] selective and categorical ban on newsracks dispensing 'commercial handbills.'" Rejecting the city's regulation, the Court noted that "the city's argument attaches more importance to the distinction between commercial and noncommercial speech than our cases warrant and seriously underestimates the value of commercial speech." Similarly, in 44 Liquormart, Inc. v. Rhode Island , Justice Stevens, writing for a plurality, suggested that the First Amendment requires a full, "rigorous review" of any commercial speech regulations "unrelated to the preservation of a fair bargaining process[.]" Even applying the Hudson analysis, there are arguments that flag-misuse laws regarding advertising would violate free speech. Assuming such advertising neither involved an inherently unlawful activity nor was intended to mislead a viewer (the first prong of the Central Hudson test), the law would be subject to the remaining three prongs of Central Hudson : whether there is a substantial government interest, whether the law directly advances that governmental interest and whether the law is "narrowly drawn." While this analysis would occur in the context of commercial speech, the Court's analysis of restrictions on symbolic speech, which is similar to the analysis of commercial speech, would be relevant. For instance, while concerns about avoiding a breach of the peace is a substantial governmental interest, it seems unlikely that, after Spence and Johnson , the Court would find that prohibiting using a flag for commercial advertising was intended to avoid a breach of the peace. Similarly, preserving the flag as a symbol of national unity, while it might be a substantial governmental interest, would also seem unlikely to be significantly damaged by the use of flags for commercial activity. Finally, as in Eichman , preserving the physical integrity of a privately owned flag would be unlikely to be a sufficient government interest to outweigh the suppression of expressive conduct. Thus, a court would be likely to find that enforcement of a flag-misuse statute against a commercial advertisement violates precepts of free speech. Can Schools Require Teacher-Led Recitation of the Pledge of Allegiance? Teacher-led recitations of the Pledge of Allegiance have been challenged as violations of the Establishment Clause of the First Amendment. Specifically, a variety of federal courts have addressed whether the use of the phrase "one Nation under God" in the Pledge of Allegiance renders a recitation of the Pledge by a teacher to students unconstitutional. For instance, the U.S. Court of Appeals for the Ninth Circuit Court (Ninth Circuit) held that daily recitations of the Pledge of Allegiance violates the Establishment Clause of the First Amendment. That decision was overturned by the Supreme Court on other grounds, however, and a later decision by the Ninth Circuit reached the opposite conclusion. In Newdow v. Unite d States Congress , the Ninth Circuit considered a case brought by a father that argued the Pledge of Allegiance recitation by his daughter's public school teacher violated the Establishment Clause of the First Amendment. The father did not claim that his daughter was compelled to recite the Pledge, but argued that his daughter was compelled to watch her state-employed teacher proclaim that there is a God and that the United States is nation under that God. The Ninth Circuit considered this challenge using the "coercion test," first articulated in the case of Lee v. Weisman , which held that "the Constitution guarantees that government may not coerce anyone to support or participate in religion or its exercise, or otherwise to act in a way which establishes a state religion or religious faith, or tends to do so." In Weisman , the court concluded that "the graduation prayers bore the imprint of the State and thus put school-age children who objected in an untenable position." The Court also considered the "heightened concerns with protecting freedom of conscience from subtle coercive pressure in the elementary and secondary public schools," holding that the school district's supervision and control of the graduation ceremony put impermissible pressure on students to participate in, or at least show respect during, the prayer. The court in Newdow similarly reasoned that the school had placed its students in the untenable position of choosing between participating in the Pledge or protesting and that the monotheistic religious content of the Pledge was not de minimus. The Supreme Court, however, overturned the Newdow case on other grounds, holding that the child's father, who had disputed custody over his child, lacked standing to bring the case. Subsequently, the Ninth Circuit, considering a Pledge of Allegiance passed by Congress after the Newdow decision (but using the same words), concluded that its previous opinion in Newdow was no longer binding precedent, that Supreme Court Establishment Clause case law had subsequently changed, and that Congress, when passing the new version of the Pledge of Allegiance, established a secular purpose for the use of the terms "Under God." Thus, the Ninth Circuit upheld the recitation of the Pledge of Allegiance by public school teachers. Other United States Courts of Appeals have also rejected Establishment Clause challenges to the recitation of the Pledge of Allegiance in public schools. Do Students Have to Recite of the Pledge of Allegiance? The flag code provides that the Pledge of Allegiance shall be rendered standing at attention facing the flag with the right hand over the heart. Many states have statutes providing that schools provide for an opportunity for the daily recitation of the Pledge by public school students. The Court in West Virginia State Board of Education v. Barnette , however, held that that mandating that a student participate in a recitation of the Pledge of Allegiance violates free speech principles under the First Amendment. As noted previously, the federal "flag code" specified conduct when delivering the Pledge of Allegiance is voluntary. In West Virginia State Board of Education , the Supreme Court considered a West Virginia Board of Education (Board) mandate for public school students to perform the Pledge on a daily basis. A child who would not participate was expelled until such time as they complied and the child's parent or guardian could be fined $50 or jailed for up to 30 days. The Court concluded that the requirement, that students perform a stiff-arm salute and recite the Pledge, was a violation of the free speech protections of the First Amendment. The plaintiffs in Ba rnette were Jehovah's witnesses whose religious beliefs conflicted with the requirement of pledging allegiance to the laws of a secular government. The Court analyzed the Board requirement as compelled speech holding that the mandated flag salute was a form of symbolic utterance. The Court also noted that remaining passive during a flag salute did not present the kind of clear and present danger that would justify regulation. The Court also discounted arguments that the Pledge fostered national unity, noting that "[a]uthority here is to be controlled by public opinion, not public opinion by authority." The Court held that these precepts applied regardless of whether there was a religious basis for the student's objection to performing the Pledge.