Professional conduct regulation cases do not support the constitutionality of this rulemaking

The existing broker disclosure obligations as applied to customer agents and principals, though never explicitly validated in the courts, may alternatively be found constitutional as a reasonable regulation of professional conduct that incidentally burdens some speech activities of the persons engaged in that regulated conduct. In that interpretation, the conduct being regulated is that of entering into an agency relationship with a customer or else acting as the principal in a sale to the customer. While a written contract is speech, the assumption of a legal relationship that it embodies is doubtlessly conduct and can be the subject of regulation.

As the Court held in United States v. O’Brien, laws affecting speech that are aimed at the regulation of non-expressive conduct are still analyzed under First Amendment jurisprudence, but face a lower level of constitutional scrutiny than laws aimed directly at the regulation of expressive conduct or at speech activities themselves: “a sufficiently important governmental interest in regulating the nonspeech element [of the regulated conduct] can justify incidental limitations on First Amendment freedoms.”⁴⁷ The compulsion to merely report privately to the IRS and to the taxpayer certain “purely factual and uncontroversial information” about the regulated non-expressive conduct may rightly be framed as an “incidental” limitation on traditional brokers’ otherwise unabridged First Amendment rights.

The O’Brien standard, however, is only applicable if the rule is targeted at regulating non-expressive conduct. Things become more complicated when the rule is targeted at regulating expressive conduct or at speech itself. There is a long though underappreciated line of cases stemming from O’Brien that points toward a reasonably straightforward series of tests for when regulation of professional conduct that burdens speech activities is constitutional. That line has been best illuminated by attorney Robert Kry in his article, “The ‘Watchman for Truth’: Professional Licensing and the First Amendment.”⁴⁸ Kry, summarizing and synthesizing many cases, finds that

In the case of a broker who is, in fact, an agent of a customer or a principal in a sale to a customer, the regulation is plausibly aimed at the non-expressive component of the professional’s activity. An agent under common law principles is acting on behalf of her customer. When a broker agrees to a sale, she binds the customer to that sale. The reporting requirement, therefore, is merely a requirement to disclose certain facts about one’s sales, i.e. one’s conduct as an agent. As a principal in a sale to a customer, the broker is, once again, engaged in conduct, a sale, and the reporting requirement merely discloses facts about that conduct. Additionally, brokers of this type are in most cases already subject to a licensing or registration requirement under other statutes.⁵⁰ Those forms of professional conduct are traditionally regulated and the tax laws merely provide for an additional recordkeeping and reporting requirement associated with that conduct. Altogether, the reporting requirement, though compelled speech, appears to be a regulation aimed at the non-expressive component of a professional’s activity. It is therefore likely constitutional.

As described earlier however, the Treasury Department’s proposed rule inappropriately departs from that customer agent or principal standard and seeks to compel speech from persons who are engaged in no such regulated conduct. A mere publisher or maintainer of software, websites, or smart contracts is not in an agency relationship with any customer, nor is she selling anything to any customer apart from, potentially, a license to use her tools or a fee charged for relaying or publishing the user’s data on a communications network or blockchain. Additionally, unlike typical brokerage, these activities do not trigger any licensing or registration requirements under other state or federal statutory schemes.

Indeed, even when such person is relaying actual cryptocurrency transaction messages that, once recorded in the blockchain, will effect a sale of some cryptocurrency, these entities typically have no actual ability to act on behalf of the user and no actual or apparent authority under agency law to act on their behalf. At most, they can choose whether or not to relay the signed transaction message (but so too can an internet service provider); they cannot alter the contents of that message such that the terms of the sale would change. They cannot and do not act as an agent of any customer nor are they a principal in a digital asset sale to any customer.⁵¹

These persons may be involved in conduct in other ways, such as paying for web hosting services, paying fees on cryptocurrency networks to record software or data in the blockchain, taking fees from users to relay their messages, or simply paying rent or otherwise maintaining facilities wherein they or their employees do the work of developing software or maintaining communications tools, but all of those activities are aimed at engaging in speech, the publication of software and data, and none of those activities give rise to the type of fiduciary or agency-like financial relationship, i.e. conduct, that justifies third-party tax reporting obligations.

Moreover, these persons have deliberately designed their software, websites, and smart contract tooling such that it can be useful to a trader and capable of facilitating their trades or other desires without the need for any agency relationship or for any legal or trust-based relationship with the publisher or any other party whatsoever. The user can and does do it all themselves. That is the point of cryptocurrency and “decentralized finance.” We can debate the merit of such a design goal,⁵² but what is not debatable is that this is how these tools are presently designed.⁵³ By demanding that these publishers rewrite their tools such that an agency relationship is established between the author of the tool and its user, such that the name, Social Security number, and other intimate details of the user are entrusted to the alleged “broker,” the regulation is squarely aimed at compelling not merely the disclosure of trading data and taxable gains, but also the compelled creation of significant expressive software and tooling to solicit and collect data in a manner that would otherwise be antithetical to the goals of the software developer. Such an order is so unprecedented that it is difficult to find appropriate metaphors or past examples. It is as if a state—frustrated that it cannot determine who is reading which books—ordered that novelists shall hold in-person book readings during which they must collect and report information about their audience.

Accordingly, when applied to mere publishers and maintainers of software, websites, and smart contracts, these regulations target the expressive activity of the alleged broker. That does not mean, however, that such rules will automatically be unconstitutional. The Court has dealt with several regulatory schemes aimed at expressive professional conduct, such as a lawyer giving legal advice to a client. Throughout these cases the Court has developed a robust series of standards for constitutionality that are focused primarily on “which kinds of advice are licensable based on how closely they resemble forms of communication associated with fiduciary relationships.”⁵⁴ This leads us to the second question in Kry’s analysis of the First Amendment limits to regulating professional conduct, what he calls the “value neutral test” because it applies irrespective of whether the speech affected is a matter of public concern and irrespective of the motives of the speaker:

Given the in-person and client-specific nature of legal services, there should be no surprise that under these cases the professional regulation of attorneys, including licensing, limits on solicitation and advertising, and—as in this rulemaking—compelled disclosures, typically withstands constitutional scrutiny. In the context of developers of cryptocurrency systems, however, the answer to Kry’s twin questions of characteristic-dependence and person-to-person context is an unqualified “no.” It is taken as written that software, websites, and smart contracts in the cryptocurrency space are built such that they are generic, serving the needs of whoever wants to use them irrespective of the characteristics of that user. It is also a given that these tools are shared widely over the internet and used freely by whoever happens to download them or (in some cases) whoever pays to license the software or pays to have their transactions relayed by the software. As such, they are never “delivered in the context of a person- to-person relationship.”⁵⁶ Accordingly, regulation of the speech activities of these developers, including compulsions to report and develop expressive software that enables that reporting, would face strict scrutiny by the Court and be found unconstitutional.

While these standards are general principles that are equally applicable to any kind of expressive conduct regulation, it is nonetheless worth noting that several of the cases that first articulated these standards dealt explicitly with speech, including software, that advised and facilitated sales of valuable assets. As such, the speech in question in these cases was very similar factually to the speech that would be burdened under the Treasury Department’s proposed rule. The value-neutral test was developed in Lowe v. SEC, a case involving the unconstitutional application of the Investment Advisers Act to a person merely publishing a public newsletter,⁵⁷ and it was further reinforced in Taucher v. Born⁵⁸ and two similar cases⁵⁹ dealing with the unconstitutional application of the Commodities Exchange Act to the developers of commodities trading software.⁶⁰