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On May 22, Vermont passed the nation’s most expansive data broker legislation in an effort to provide consumers with more information about data brokers, their data collection practices, and consumers’ right to opt out.

The legislation, which in part takes effect on January 1, 2019, defines “data brokers” to mean “a business … that knowingly collects and sells or licenses to third parties the brokered personal information of a consumer with whom the business does not have a direct relationship.” While this definition appears to be broad in scope, the controlling test to determine whether a business is a “data broker” is whether the sale or license of data is merely incidental to the business.  If the sale or license of data is merely incidental, the business would likely not be considered a data broker.

The legislation takes note of the fact that there are important differences between data brokers and businesses with whom consumers have a direct relationship.  Specifically, it finds that consumers who have a direct relationship with traditional and e-commerce businesses typically have some level of knowledge and control over the businesses’ data collection practices, including the choice to use the businesses’ products or services and the ability to opt out of certain data collection practices.  By contrast, however, consumers may not be aware that data brokers are collecting information about them or that they even exist.  As such, the new law aims to provide consumers with necessary information about data brokers, including information about their data collection activities, opt-out policies, purchaser credentialing practices, and security breaches.

Once the enacted legislation goes into effect, data brokers will be required to:

  1. Annually register with the Secretary of State and pay a registration fee of $100.00.  Notably, registration would only be required if, in the prior year, the data broker collected and licensed or sold to a third party the personal information of a Vermont consumer.
  2. Annually disclose the following information about its data collection practices:

a.  Whether the data broker permits a consumer to opt out of the data broker’s collection of brokered personal information, opt out of its databases, or opt out of certain sales of data;

b.  A statement specifying the data collection, databases, or sales activities from which a consumer may not opt out;

c.  A statement whether the data broker implements a purchaser credentialing process;

d.  The number of data security breaches experienced during the previous year, and if known, the total number of consumers affected by the breaches; and

e.  The data broker’s collection practices as it relates to minors.

  1. Develop, implement, and maintain a comprehensive information security program that contains administrative, technical, and physical safeguards appropriate for the size, scope, and type of business of the data broker.  Notably, a violation of the legislation’s information security requirements will constitute an “unfair and deceptive act” for which the Attorney General is authorized to bring an enforcement action.

Attorney General T.J. Donovan applauded lawmakers for the passage of the law and stated that “the state has a strong public safety interest in transparency, data security, and consumer protection generally with respect to commercial interests that elect to engage in the business of buying and selling consumer data without the consumer’s knowledge.”  And while “transparency of information is great when it comes to government,” said Vermont Secretary of State Jim Condos, it is not “for individuals and their personal information.”

Psychologists say that adolescents and young adults take more risks than any other age group. Perhaps this is why about one in five (21.2%) college students receiving financial aid to pay for their education have invested these loans in a cryptocurrency, according to a recent survey by The Student Loan Report, a website for student loan information.

Some Basics Facts About Today’s Popular Cryptocurrencies

According to numerous financial metrics, cryptocurrencies constituted one of the hottest investments of 2017, especially for young Americans. In the summer of 2017, these digital assets reached a combined market capitalization of $100 billion, split among bitcoin ($45 billion, or 40.1%), ethereum ($31 billion, or 28.3%), ripple ($12 billion, or 11.04%), litecoin ($2 billion, or 2.2%), ethereum classic ($2 billion, or 1.71%), nem ($1.7 billion, or 1.5), Dash ($1.3 billion, or 1.2%), and over 800 other currencies with market caps ranging from $1,000 to $800,000. Created in 2009, bitcoin was the first decentralized cryptocurrency and remains the most well-known. As these numbers reveal, however, countless variants, frequently called “altcoins,” (short for “alternative coins”), now exist.

“Cryptocurrencies represent an entirely new asset class and financial sector,” opined Ashe Whitener, a cryptocurrency enthusiast who formerly worked in business development for Euro Pacific Bank. Drew Cloud, Student Loan Report’s founder, told The Boston Globe: “Younger Americans are certainly the most enthusiastic about cryptocurrency; they are the most active investors and want to get involved in the space in any way possible.” Colleges today offer courses on these digital tokens, while a company called Campus Coin is attempting to establish cryptocurrencies as a medium of exchange at colleges throughout the country. At the same time, others have called the enthusiasm around cryptocurrencies “speculative mania.”

This objection is not an idle one, as dramatic and inexplicable swings regularly wrack this market. For example, on January 1, 2017, a single bitcoin held a value of only $968; in December 2017, it was worth $19,783. By January 2018, bitcoin posted its worst monthly performance in three years: slipping below $6,000, it lost 70% of its value. Although it jumped to approximately $10,000 by February 15, 2018, it plummeted by 23.11% to $7,688.68 on March 14, 2018, with the announcement of a partial ban on online cryptocurrency advertising. Bitcoin slightly recovered to $8,600 by March 22 and fell to $8,490 by March 23.

Subject to a similar rollercoaster ride, Ethereum, the market’s second most-valuable cryptocurrency, was valued at over $1,400 in January 2017 but has since slumped to $520.

Less popular and smaller digital coins have proven even more volatile. Tron (TRX), for instance, reached a high of 30 cents on January 4, 2018, before nosediving to 4 cents within thirty days.

The dangers of investing in cryptocurrencies thus replicate the perils of investing in very small capital stocks. As one expert put it, “You can see big swings in a short period of time. There’s still a lot of price discovery going on.”

Financial and Legal Risks of Investing Student Loan Funds in Cryptocurrencies

Because investing in cryptocurrencies carries risk – and because student loans are intended for use in funding higher education, not speculating on the cryptocurrency market – student loan experts have been surprised by borrowers’ willingness to invest nearly non-dischargeable sums in this newest market.

“Investing from a . . . [student] loan is a terrible idea as these assets are extremely risky and volatile,” pointed out Christian Catalini, an assistant professor at the Massachusetts Institute of Technology who researches blockchain technology and cryptocurrencies. Others agree. “If you invest the student loans in cryptocurrency and lose money, you will still owe the student loans,” observed Mark Kantrowitz, a student loan expert. “And, where will you get the money to pay for college costs?”

For its part, the United States Department of Education has warned, “Federal student aid funds are to be used only to help meet the costs of attending an eligible institution of higher education. Investing is not considered an appropriate use of federal student aid funds.”

Trend Worth Watching 

For the sake of their bottom line, every participant in the student loan market, including loan providers and servicers, would be wise to monitor student borrowers’ investment of loan proceeds, particularly in innovative but volatile financial instruments.

In a unanimous decision on March 20, 2018, the United States Supreme Court held in Cyan, Inc. et al. v. Beaver County Employees Retirement Fund, et al., 583 U.S. ____ (2018) that state and federal courts retain concurrent jurisdiction to adjudicate class actions brought under the Securities Act of 1933 (the “Securities Act”) and such claims may not be removed to federal court. The opinion, delivered by Justice Elena Kagan, affirms the decision of the California Court of Appeals First Appellate District and settles a long-standing circuit split over whether the Securities Litigation Uniform Standards Act of 1998 (the “SLUSA”) divested state courts of subject matter jurisdiction over “covered class actions” where plaintiffs allege only Securities Act claims and no state law claims.

The decision was largely based on the statutory interpretation and legislative history of SLUSA—namely, its amendments to the jurisdictional provisions of the Securities Act. Indeed, the crux of this case lies in the interpretation of SLUSA’s amendment stating:

The district courts of the United States . . . shall have jurisdiction . . . , concurrent with State and Territorial courts, except as provided in section 77p of this title with respect to covered class actions, of all suits in equity and actions at law brought to enforce any liability or duty created by this subchapter. [1]

Defendants argued that this provision strips state courts of concurrent jurisdiction over Securities Act claims because of the “except as provided” clause’s reference to “covered class actions.” Plaintiffs argued that this provision maintains state courts’ jurisdiction over all suits – including “covered class actions” – alleging only Securities Act claims. Notably, the U.S. government, which filed an amicus brief at the Court’s request, took a third approach, arguing that SLUSA does not deprive state courts of concurrent jurisdiction over cases brought under the Securities Act but does allow defendants to remove these cases to federal court.

The Court found that class actions asserting only Securities Act claims are unaffected by SLUSA, and thus, can be brought in state court – Section 77p “says nothing, and so does nothing, to deprive state courts of jurisdiction over class actions based on federal law.” The Court concluded that “SLUSA’s text, read most straightforwardly,” leaves state court jurisdiction intact and, if Congress wanted to deprive state courts of jurisdiction, it could have inserted an exclusive federal jurisdiction provision. Additionally, the Court held that SLUSA does not permit defendants to remove class actions alleging only Securities Act claims from state to federal court. Finally, the Court concluded that, “[i]f further steps are needed, they are up to Congress.”

The practical impact of the Court’s ruling is a likely increase in Securities Act claims brought in state court, with defendants potentially having to litigate these federal securities claims in federal and state courts simultaneously and in various venues. Given that plaintiffs may continue to argue for the application of certain state courts’ more lenient pleading standards and discovery procedures, defendants may be exposed to protracted, expensive, and cumbersome litigation in various courts across the country.

[1] 15 U.S.C. § 77v(a) (emphasis added).