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Date: Sun, 14 May 1995 20:41:00 -0400 (EDT)
From: KALLISTE@delphi.com
Subject: Re: money laundering & digital cash
To: ramin@ping.at
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THE END OF ORDINARY MONEY

by  J. Orlin Grabbe

Late one night while sharing a
pharmacological product with a spook I met in the
northeastern part of the United States, I mentioned I
was studying cryptology. 

"Cryptology is the *future*," he responded
emphatically.  "It's what's going to protect us from
Big Brother." 

Since he worked for the National Security
Agency (NSA), the thought did occur to me that
many would have taken the position that he and his
colleagues *were* Big Brother.  But I had learned
years ago not to demonize people on the basis of an
accidental profession.  After all, if an ex-CIA
employee like Kerry Thornley could become a
staunch libertarian, the creator of Zenarchy and
implied co-author of  the Erisian holy book
Principia Discordia [1], then there was hope for all
of us.  I additionally believed that one of our best
defenses against the national security state was the
perennial proclivity of clandestine organizations to
piss off their own employees [2].

At any rate, the spook spoke the truth:
cryptology represents the future of privacy, and
more.  By implication cryptology also represents the
future of money, and the future of banking and
finance. (By "money" I mean the medium of
exchange, the institutional mechanisms for making
transactions, whether by cash, check, debit card or
other electronic transfer.)  Given the choice between
intersecting with a monetary system that leaves a
detailed electronic trail of all one's financial
activities, and a parallel system that ensures
anonymity and privacy, people will opt for the
latter.  Moreover, they will *demand* the latter,
because the current monetary system is being turned
into the principal instrument of surveillance and
control by tyrannical elements in Western
governments.  

These elements all want to know where your
money comes from, and when and how you spend
it.  After all, you might be a terrorist, drug dealer,
or spy.  And if you try to hide your transactions, you
are by definition a money launderer and perhaps a
child pornographer. 

Say what? To understand this quaint
accusatorial juxtaposition, one only has to grasp a
few simple facts:  Money is digital information. 
The way to hide digital information is through
cryptography. The government doesn't want you
using cryptography, because they want to know
where your money is so they can get some of it. 
And they don't like you using drugs, unless the
government is the dealer [3], or viewing child
pornography, unless the government supplies it
because it is setting you up for blackmail or a smear
campaign [4].

Okay, I'll admit it.  I like privacy (I often
send mail inside sealed envelopes, and sometimes
close the door when I go to the bathroom), take
drugs (nothing like a cup of expresso in the
morning), and don't like to pay taxes (but doesn't
H&R Block make a living off this same popular
sentiment?). I don't know much about child
pornography, but a friend of a friend is said to have
a distant cousin who swears he keeps several
hundred gigabytes of encrypted pictures of naked
children stored in NSA computers at Ft. Meade. ("No
one breaks in there," the cousin supposedly brags.)
[5]

This is serious stuff.  Consider the following
items as pieces of an overall mosaic, whose ultimate
meaning will become even more obscure as we
proceed.


munitions, and its export is restricted by the State
Department. The International Traffic in Arms
Regulations (ITAR) defines "encryption software"
to include not only computer programs designed to
protect the privacy of information, but all of the
technical data about those programs.  ITAR
restrictions continue to be enforced, even though the
Justice Department originally found them
unconstitutional [6].  Mail a copy of your new
encryption program to a friend in Italy, and--
presto!--you are subject to prosecution as an
international arms dealer. (It is not, however, illegal
to export your program to outer space, or to deliver
it to your friend by rocket, since a "launch vehicle
or payload shall not, by the launching of such
vehicle, be considered export for the purposes of
this subchapter" (120.10).)


points out how the spread of cryptology plays into
the hands of pedophiles:  "Take for example the
campaign to distribute PGP ('Pretty Good Privacy')
encryption on the Internet. Some argue that
widespread availability of this encryption will help
Latvian freedom fighters today and American
freedom fighters tomorrow. Well, not quite. Rather,
one of the earliest users of PGP was a high-tech
pedophile in Santa Clara, California. He used PGP
to encrypt files that, police suspect, include a diary
of his contacts with susceptible young boys using
computer bulletin boards all over the country. 'What
really bothers me,' says Detective Brian Kennedy of
the Sacramento, California, Sheriff's Department, 'is
that there could be kids out there who need help
badly, but thanks to this encryption, we'll never
reach them' " [7] .

Which does lead to a few questions.  Since
the NSA is the largest user of encryption software in
the world, does that mean NSA is rife with
pedophiles?  Are police *suspicions* to be taken as
convincing evidence?  And what if this alleged
pedophile had never kept notes in the first place? 
But never mind. What really bothers me is that there
could be kids out there who need help badly, but
thanks to sloppy records, extended ignorance, and
appeals to national security, we'll never reach them.

The NSA Chief Counsel also noted, as he
had in previous speeches, ". . . it's the proponents of
widespread unbreakable encryption who want to
create a brave new world, one in which all of us--
crooks included--have a guarantee that the
government can't tap our phones." Which caused
one observer, Bruce Sterling, to remark, "As a
professional science fiction writer I remember being
immediately struck by the deep conviction that there
was plenty of Brave New World to go around" [8].


Dorthy Denning reminds us that "Because 
encryption can make communications immune from
lawful interception, it threatens a key law
enforcement tool. The proliferation of high quality,
portable, easy-to-use, and affordable encryption
could be harmful to society if law enforcement does
not have the means to decrypt lawfully intercepted
communications. Although encryption of stored
files is also of concern, 99% of the issue is
telephone communications (voice, fax, and data)"
[9]. 

The reason for this is all those people on the
phone dealing drugs.  "Almost two thirds of all
court orders for electronic surveillance are used to
fight the war on drugs, and electronic surveillance
has been critical in identifying and then dismantling
major drug trafficking organizations.  In an
operation code named 'PIZZA CONNECTION,' an
FBI international investigation into the importation
and distribution of $1.6 billion worth of heroin by
the Sicilian Mafia and La Cosa Nostra resulted in
the indictment of 57 high-level drug traffickers in
the U.S. and 5 in Italy . . ..  The FBI estimates that
the war on drugs and its continuing legacy of
violent street crime would be substantially, if not
totally, lost if law enforcement were to lose its
capability for electronic surveillance" [10].

In fact, that's supposed to settle the issue
right there:  "We need such-and-such to fight the
war on drugs.  Case closed."  This argument is used
ad nauseam in document after document.  Nowhere
is the issue raised:  Oh yeah?  So why are we
fighting a war on drugs?  Such questions are ruled
out, because we're dealing with *needs* here, and
needs spew forth their own logic and evolve their
own morals.


get all that drug money for themselves, the part they
don't already have.  The U.S. State Department
proposes a sort of international spree of 
government theft: "We must effect greater asset
seizures, not just of bank accounts, but also
corporate assets and even corporate entities . . . We
must be ready to impose appropriate sanctions
against banking institutions, as well as bankers . . .
The FATF [Financial Task Force] countries, the 12
EU [European Union] nations, the EFTA countries,
and the majority of the 95 states party to the 1988
UN Convention are adopting (if not yet fully
implementing) legislation that will ultimately
improve individual and collective capabilities." [11]  

Everyone is suspect.  You say you want to
buy some Portuguese escudos?  We better keep our
eye on you--you're a potential money launderer. 
According to the State Department, "Entry in the
European monetary system has made the escudo,
which became fully convertible in 1993, more
attractive to potential money launderers" [12].
Hmm. Hey, fellows. With that mentality, you
should send some investigators from Foggy Bottom
up to 19th Street. You'll find an entire building, an
outfit called the International Monetary Fund, which
was originally set up to work for currency
convertibility.  No telling what wicked *potential*
money laundering havens they're working on next.   


Network (FinCEN) located in Vienna, Virginia, was
set up in April 1990 to track money laundering, and
given computerized access to data from pretty much
everyone--FBI, DEA, Secret Service, Customs
Service, Postal Service, CIA, NSA, Defense
Intelligence Agency, National Security Council, the
State Department's Bureau of Intelligence and
Research, and, yes, the IRS (despite denials).
FinCEN has a $2.4 million contract with Los
Alamos National Laboratory to develop artificial
intelligence programs to look for unexplained
money flows [13].  FinCEN also proposed a
"Deposit Tracking System" (DTS) that would also
track deposits to, or withdrawals from, U.S. banks
accounts in real time.


just an average Joe), how would you react to all this
unwanted attention?  Try to keep a low profile,
maybe?  Perhaps opt out of the usual banking
channels? "During the past two years, analysts saw
an increasing use of non-bank financial institutions,
especially exchange houses, check cashing services,
credit unions, and instruments like postal money
orders, cashiers checks, and certificates of deposit
(particularly in 'bearer' form), with transactions
occurring in an ever longer list of countries and
territories" [12].

This process whereby money flows through
non-traditional banking channels is termed

whenever a government manipulates banking
services in such a way to make them less attractive. 
For example, if bank deposits have an interest rate
ceiling of  3 percent, you may elect to pull your
money out of bank deposits, and purchase Treasury
bills which  have no ceiling.  In the same way, if the
government is looking around in your bank account,
perhaps with the idea of seizing it, or seizing you,
you may elect not to have a bank account, or at least
not one the government knows about.  Or you may
elect to use non-traditional financial channels which
are less likely to be observed.   The ultimate end of
the process is completely anonymous banking
through encrypted digital cash.      

The State Department also notes will alarm
that "[drug] traffickers were employing professional
money managers." Which does lead one to reflect,
whatever is the world coming to?  The next thing
you know,  drug dealers will be shopping at the
local grocery store and sending their children to
better schools.  They'll be mowing their lawns and
sprucing up the neighborhood. How could we live
in such a society?


IRS hot and bothered also. Not in a negative way,
mind you.  The IRS has become obsessed with the
noble goal to save us time by just sending us a bill: 
"In an effort to catch more tax cheats, the Internal
Revenue Service plans to vastly expand the secret
computer database of information it keeps on
virtually all Americans. . . .'Ultimately, the IRS may
obtain enough information to prepare most tax
returns,' said Coleta Brueck, the agency's top
document processing official.  'If I know what
you've made during the year', she said, 'if I know
what your withholding is, if I know what your
spending pattern is, I should be able to generate for
you a tax return...' " [14]. 

We have nothing to fear, apparently, but

Coleta, you had better prepare for a flood of data
that is spending-pattern impaired, because
according to the Crypto Anarchist Manifesto, "Just
as the technology of printing altered and reduced
the power of medieval guilds and the social power
structure, so too will cryptologic methods
fundamentally alter the nature of corporations and
of government interference in economic
transactions" [15].

How did we come to this state of catch as
catch can, and where are we going from here? 
Perhaps history will give some perspective.  Let's
start with that big bugaboo--drugs. In article logic,
drug prohibition leads to money laundering, which
leads to increased surveillance of banking
transactions, and heightens interest in anonymity
through cryptology.

Oh, What a Lovely War!

In the mid-1990s the United States and other
countries were spending a good deal of money on a
"war on drugs."  What the phrase meant was unclear
in a nation where 50 million people used tobacco,
over 100 million used alcohol, and virtually
everyone used aspirin or an equivalent pain-reliever. 
But certainly there was a prohibition in using, or
dealing in, certain drugs.  Naturally these drugs
were still available on the black market despite the
prohibition.  The market supplied the consumption
needs not only of the general public, but also of 
federal prisoners.  Thus even if the country were
turned into a police state, such drugs would still be
available.  Given this, what was the purpose or
function of the prohibition?  The simple economic
rationale was this: the war on drugs was a source of
profit both to those who dealt in prohibited drugs,
and those who conducted the war against them.

The prohibition of anything is a restriction
in supply.  Supply restriction drives up the price.  In
1973-4 the OPEC cartel caused a quick four-fold
increase in the price of oil by restricting its supply. 
It also greatly increased the profit margin on each
barrel pumped out of the ground.  In a similar way,
prohibition of drugs increases their black market
price and the potential profit margin from supplying
them to the public. But legitimate businessmen are
deterred from entering the market.  Hence drug
prohibition creates a bonanza--high profit margins
--only for those willing to deal in prohibited
products.   Just as alcohol prohibition financed the
growth of powerful mobsters like Al Capone earlier
in the century, so did prohibition of cocaine  finance
the growth of powerful production and supply
cartels, such as the Cali cartel in Colombia.   The
U.S. government's prohibition made it possible for
them to become rich, and then powerful.

Because trade in drugs is illegal, contracts
cannot be enforced in court.  One cannot resort to
common or commercial law.  Hence contracts are
often enforced via the barrel of a gun.  And as there
is no countervailing authority, those who enforce
their contracts with guns may use the same method
to simply eliminate competition.  Territory is
acquired or defended by force. Steven B. Duke, the
Law of Science and Technology Professor at Yale
University states simply:  "The use of drugs--
except, of course, alcohol--causes almost no
crime."  But drug *prohibition* does cause crime. The
firearm assault and murder rates rose in the U.S.
with the start of Prohibition in 1920, and remained
high during it, but then declined for eleven
consequence years after Prohibition was repealed.
In the U.S. today, perhaps one-third of murders are
related to contract enforcement and competition
over dealing territory [16]. 

Prohibition turns others into crime victims. 
Because certain drugs cannot be obtained at the
local neighborhood drugstore, drug consumers visit
unsafe parts of a city, and are simply assaulted. 
Such victims, naturally, are not in a position to
complain to the police. Others become victims
because of the lack of quality control.  Because
drugs are illegal, rip-off artists who deal in
substitute or impure products know they will not be
sued.  Other suppliers simply make mistakes in
production, but these mistakes are not caught right
away because information flow is not efficient in a
non-public market.  This results in injuries, often
caused not the use of the prohibited drugs
themselves, but by the constraint on the flow of
information brought about by prohibition. 

During the earlier era of alcohol Prohibition
in the U.S., many of a city's leading citizens became
criminals by the fact of visiting the bar of a local
speakeasy.  There, naturally, they associated with
the proprietors, mobsters, who began to acquire
increasing political influence. Today billions of
dollars in cocaine profits leads to wide-spread
corruption [17].

About 1.2 million suspected drug offenders
are arrested each year in the U.S., most of them for
simple possession or petty sale [18]. Currently in
the U.S., police spend one-half their time on drug-
related crimes. The court system is on the verge of
collapse because of the proliferation of drug cases,
which-because they are criminal cases-have
priority over civil cases. Six out of ten federal
inmates are in prison on drug charges. Probably
another two of the ten are there on prohibition-
related offenses.  There is a crisis in prison
crowding (forty states are under court order to
reduce overcrowding), with the result that violent
criminals--including child molesters, multiple
rapists, and kidnappers--are often released early. 
This is reinforced by mandatory sentencing laws. 
Consensual drug offenses are not only treated as the
moral equivalent of murder, rape, or kidnapping: 
they are given harsher punishment.  Youths are sent
to prison for life for selling drugs, while murderers
were eligible for early parole for good behavior
[19].  As one example,  Florida punishes "simple
rape" by a maximum prison term of 15 years,
second-degree murder with no mandatory minimum
and a maximum of life in prison , first degree
murder (where the death penalty is not imposed)
with a mandatory minimum penalty of 25 years,
after which one is eligible for parole, but trafficking
in cocaine is punished with life imprisonment
"without the possibility of parole."

The war on drugs has turned into a war on
civil liberties  The reason is simple.  The war is a
war on people suspected of using, or dealing in, or
otherwise being involved in drugs.  But the drug
industry survives because tens of millions of people
engage in voluntary transactions, which they try to
keep secret.  Hence law enforcement must attempt
to penetrate the private lives of millions of 
suspects, which could be almost anyone.  A Nobel
prize-winning economist wrote:  "Every friend of
freedom . . . must be as revolted as I am by the
prospect of turning the U.S. into an armed camp, by
the vision of jails filled with casual drug users and
of an army of enforcers empowered to invade the
liberty of citizens on slight evidence" [20].
Unfortunately, not everyone is a friend of freedom. 
A mayor of New York advocated strip searching
travelers from Asia and South America.  A U.S.
congressman introduced a bill to create an
"American Gulag" of Arctic prison camps for drug
offenders.  And so on.

The drug trade is sustained by prohibition
itself.  Agencies like the Drug Enforcement
Administration (DEA) grew up to "fight" the drug
war.  Their budgets, prestige, and paychecks depend
on the war's continuation.  These agencies have vast
sums to spend on public relations and propaganda
("education"), and a vested interest against
legalization.  Since these agencies profit from
crime, they have an incentive to cultivate
criminality as a natural resource.  The sheriff of
Broward County, Florida, manufactured his own
crack cocaine to sell to buyers in order to arrest
them [21].  Others employ cocaine gigolos, who
then pressure unsuspecting boyfriends/girlfriends
into purchasing drugs from undercover agents (e.g.,
United States v. Eugenio Llamera, No. 84-167-Cr
(S.D. Fla. 1984)).  Periodically a new "biggest ever"
drug bust (such as 22 tons of cocaine in a Los
Angeles warehouse) is proudly announced, with no
apparent perception that such busts prove the
agencies are failing in their alleged goal of drug
elimination. Meanwhile, some government
employees-drug warriors-themselves engage in
criminal acts for enjoyment or to supplement their
income.  Drug dealers, in particular, can be killed
and robbed with impunity.  Forfeiture laws, which
allow the seizure of money, houses, boats, cars,
planes, and other property on the basis of a
circumstantial connection with prohibited drugs,
have also been profitable.  The associate deputy
attorney general in charge of the U.S. Justice
Department's forfeiture program said "we're not at
all apologetic about the fact that we do benefit
(financially) from it" [22].

Others are paid to extend the war
internationally.  Examples include Latin American
coca crop eradication and substitution programs. 
These have had almost no success, and have created
massive social problems [23]. Poor farmers can
make four to ten times as much growing coca as in
growing legal crops [24]; they can grow coca and
marijuana in regions with poor soil; and they can
avoid oppressive agricultural regulations
encountered with the production and sale of crops
lacking an efficient alternative to government
marketing organizations.  The 200,000 peasant
families (1 million people) engaged in coca
production in Peru are oblivious to campaigns
urging them to "just say no" to the source of their
livelihood.

In the last few years, the use of, and hence
the demand for,  cocaine has fallen.  But there are
always new ways to justify increased drug war
budgets.  The U.S. Department of State notes, with
no awareness of the irony of the statement: "The
economics of the heroin trade are also important. 
While at U.S. street prices, cocaine and heroin are
competitive, at the wholesale level heroin has a
strong advantage.  A kilo of cocaine wholesales for
between $10,500 and $40,000; a kilo of heroin will
fetch on average between $50,000 and $250,000. 
With the likelihood that heroin will be to the 1990's
what cocaine was to the 1980's, Latin American
trafficking organizations are poised to cash in on a
heroin epidemic" [12].   And, naturally, so also are
those who fight them. 

For at some point it occurred to these drug
warriors, mighty and bold, that there were easier
ways to make a living.  Why not just go after the
cash?  After all, if you go out to the poppy fields
you may get your boots muddy, and (more
importantly) bankers don't carry guns.

99 and 44/100 Percent Pure

The House of Representatives report on the
banking legislation leading up to the U.S. Banking
Secrecy Act of 1970 noted that "secret foreign bank
accounts and secret foreign financial institutions"
had been used, among other things, to "purchase
gold," and to serve "as the ultimate depository of
black market proceeds from Vietnam" [25]. The
report does not explain why the purchase of gold
was a menace to society, nor elaborate on the role of
the House in creating a black market in Vietnam. 
Within a few years gold was legalized, and the
absence of U.S. military forces in Vietnam
eliminated the black market.  The report also noted: 
"Unwarranted and unwanted credit is being pumped
into our markets."  This was also attributed to
foreign banks with secrecy laws, although the
Federal Reserve*the real source of excess credit in
the years leading up to the breakdown of Bretton
Woods*is not foreign.  In short, the House report
was a broad-based attack with little rhyme or
reason, setting the tone for similar future studies.  

As is usual in political double-speak, the
Banking Secrecy Act was an act of legislation
intended to prevent, not preserve, banking secrecy. 
It created four requirements that were supposed to
address the issue of money laundering:  1) A paper
trail of bank records had to be maintained for five
years.  2) A Currency Transaction Report (CTR)
had to be filed by banks and other financial
institutions for currency transactions greater than
$10,000.  CTRs were filed with the IRS.  3) A
Currency or Monetary Instrument Report (CMIR)
had to be filed when currency or monetary
instruments greater than $5,000 were taken out of
the U.S.  CMIRs were filed with the Customs
Service. 4) A Foreign Bank Account Report
(FBAR) had to filed whenever a person had an
account in a foreign bank greater than $5,000 in
value. (The latter two requirements have been
increased to $10,000.)

These reports mostly collected unread
during the 1970s.  But that was to change with the
growth in computerized recordkeeping and artificial
intelligence processing, and with the escalation of
the "war on drugs."  In the early 1980s, a Senate
staff study noted in alarm "what appears to be
otherwise ordinary Americans engaged in using
offshore facilities to facilitate tax fraud.  These
cases signify that the illegal use of offshore
facilities has enveloped 'the man next door'--a trend
which forecasts severe consequences for the
country"  [26]. 

The same report made a concerted effort to
draw connections between the eurodollar market
and criminal activity, noting "few banking
authorities address the issue of primary concern to
us here: criminal uses of Eurobanking."  The focus
was not banking fraud or theft:  "The most visible
and notorious aspect of offshore criminality
involves drug traffic."  One of the report's many
recommendations was that the Treasury Department
should  work with the "Federal Reserve Board to
develop a better understanding of the financial
significance and use of currency repatriation data as
well as information about foreign depositors'
currency deposits."  Subsequently, Panama was
identified as the major banking center for the
cocaine trade, and Hong Kong as the major center
for the heroin trade, based largely on the amount of
U.S. dollars, including cash, being return to the
Federal Reserve by, respectively, the Banco
National de Panama and by Hong Kong-based
banks [27].

Thus, with that simple act, the Federal
Reserve Board was transformed from an institution
that watched over the currency to a co-conspirator
that watched over currency users.

Efforts were extended internationally to
trace cash movements.  The Bank for International
Settlements (BIS) Code of Conduct (1984)
recommended a global version of the CRT. 
Information from the global CRT was to be
processed by the OECD and shared with tax
authorities in all industrialized countries. The G-7
countries in 1989 agreed to form the Financial
Action Task Force (FATF), with staffing and
support to be provided by the OECD. FATF now
includes 26 governments. In May 1990, FATF
adopted forty recommendations on money
laundering countermeasures.  These included
provisions that a global currency tracking system
(the global CRT proposed earlier by the BIS) be
created, that financial institutions be required to
report "suspicious transactions" to law enforcement
authorities, that global sting operations be used
against launderers, and that electronic money
movements, especially international wire transfers,
be monitored.

So better beware your banker:  by law, he's a
snitch.  Maybe even a government employee.  In
one recent example of a global sting,  government
officials set up a bank in the Caribbean (Anguilla),
and advertised their services in confidential
banking.  They then turned all the information over
to tax authorities.  Did you ever wonder why
uneducated people believe in international banking
conspiracies?

The Digital World of Money

Money is a mechanism for making payment. 
What we want from a payments mechanism is fast,
reliable (secure) service at a low cost.  In current
technology that means that the payment mechanism
will be determined by transactions costs.  Hence
money in a modern economy exists chiefly in the
form of electronic entries in computerized
recordkeeping systems or data bases. Money exists
as a number (e.g. 20) beside which is attached a
currency or country label (e.g. DM or BP or U.S.$)
and also an ownership label (e.g. "Deutsche Bank"
or "Microsoft" or "Jack Parsons").  Physical goods
are transported to different geographical locations,
but currencies by and large are not.  This is true
both domestically and internationally. A bank in
London will sell British pounds to a bank in
Frankfurt for deutschemarks by having the
Frankfurt bank's name recorded as the new owner of
a pound deposit in London, while the London
bank's name is recorded as the new owner of a
deutschemark deposit in Frankfurt.  

Payment between banks is made by an
exchange of electronic messages.  The scope and
size of transactions mandates this type of payment
mechanism.  The most important communications
network for international financial market
transactions is the Society for Worldwide Interbank
Financial Telecommunication (SWIFT), a Belgian
not-for-profit cooperative. This system for
transferring foreign exchange deposits and loans
began actual operation in May 1977 and by 1990
had 1,812 members, and connected 3,049 banks and
securities industry participants in eighty-four
countries.  It carried an average of 1.1 million
messages per day. SWIFT messages are transmitted
=66rom country to country via central, interconnected
operating centers located in Brussels, Amsterdam,
and Culpeper, Virginia. These three operating
centers are in turn connected by international data-
transmission lines to regional processors in most
member countries. Banks in an individual country
use the available national communication facilities
to send messages to the regional processor. A bank
in London, for example, will access SWIFT by
sending messages to a regional processing center in
the north of London [28]. The message will be
received by a bank in New York via the SWIFT
operating center in Culpeper, Virginia.

Within the U.S. the most important
communications-money-channels are Fedwire
and CHIPS.  Eleven thousand depository
institutions have access to Fedwire, the electronic
network system of the Federal Reserve System. 
(About a thousand of these access the system
through the New York Fed.)  In 1991 an average of
$766 billion daily went through the net, of which
$435 billion involved the New York Fed.  The
average size of a funds transfer was $3 million. 
There were 258,000 average daily  transfers.

The New York Clearing House Association
(twelve private commercial banks) operate the
Clearing House Interbank Payments System
(CHIPS) to settle foreign exchange and eurodollar
transactions.  CHIPS connected 122 participants in
1991.  On an average day $866 billion went through
the CHIPS network, with 150,000 average daily
transfers (or an average transfer size of about $5.7
million).  Sometimes there are large fluctuations in
the level of payments.  On January 21, 1992,
$1.5977 trillion went through the CHIPS system.
That is, the U.S. M1 money stock turned over
several times in a single day. The CHIPS system
maintains an account at the New York Fed.  Much
of the nation's money flows through what is literally
an underground economy:  the computer banks
located beneath 55 Water Street in Manhattan.

These systems, even the Fedwire system, did
not arise by centralized government planning.  ". . .
it is historically accurate that the Fedwire system
evolved in almost a 'natural' manner; no one at the
Board or at a Reserve bank ever sat down and said
'let there be a wire transfer system.'  Thus, Fedwire
can be regarded as an example of a market tendency
to evolve, over time, in an efficient manner" [29].

In Europe, banks have available
CEBAMAIL, a shared voice and data network
established by European central banks and later
expanded to other users.  European banks also use
IBM's International Network and DIAL service to
communicate with the Bank for International
Settlements in Basle, Switzerland, and with each
other.

Money, then, is part of the worldwide
information superhighway (or infobahn).  The
Clinton administration's proposal for a "National
Information Infrastructure" (NII) was announced in
1994:  "All Americans have a stake in the
construction of an advanced National Information
Infrastructure (NII), a seamless web of
communications networks, computers, databases,
and consumer electronics that will put vast amounts
of information at users' fingertips.  Development of
the NII can help unleash an information revolution
that will change forever the way people live, work,
and interact with each other" [30].

To be sure, the ensuing hype has made the
whole thing sound like more circuses to keep the
masses pacified and thirsty:  500 channels of MTV
with beer and Pepsi ads, and insurance salesmen
popping out of your home computer. But the
information revolution was already well underway,
and had been so for years. The real agenda for
government involvement was stated in the White
House Press release, April 16, 1993: "Sophisticated
encryption technology has been used for years to
protect electronic funds transfer.  . . While
encryption technology can help Americans protect
business secrets and the unauthorized release of
personal information, it also can be used by
terrorists, drug dealers, and other criminals."

Now, in fact, almost all modern technology,
=66rom can openers to automobiles, can be used by
terrorists, drugs dealers, and criminals (even the
thieves in the Justice Department who preside over
asset forfeitures). But what is special about
cryptography is that it threatens to slow or nullify
the effectiveness of government-sponsored
computer surveillance of individuals and private
business.  To get a handle on this, let's brush up our
high school cryptography, which has probably
grown rusty from lack of use.  Eager students can
read an exhaustive history of the subject written by
David Kahn [31], but we will only focus on the tail-
end, post-Kahnian part of the story, on something
called "public key cryptography" [32].

Public Key Cryptography in One Easy Lesson

Public key cryptography relies on two
scrambling devices, called "keys", that have the
following relationship.  There is a public key P and
a private key R.  Suppose I write a sweet, sensitive
love letter, filled with spiritual values, genetic
imperatives, and sexual innuendo, to my current
flame Veronica.  Let's refer to this letter as the
message M.  I sign it with Veronica's public key P,
producing the encrypted message P(M).  Anyone
looking at P(M) will only see a string of
meaningless symbols, gibberish. When Veronica
receives it, she will apply her private key R to the
encrypted message, producing R(P(M)) =3D M,
turning the apparent randomness into tears, joy, and
erotic fantasy. 

The key pairs P and R must have the
relationship that for any message M, R(P(M)) =3D M.
In addition, it should be practically impossible for
anyone to determine M from P(M), without the
associated private key R.  For any other private key
R',  R'(P(M)) is not equal to M--it's still gibberish.  
The key pairs P and R also have the commutative
relationship P(R(M)) =3D M:  if you encrypt a
message with your private key R, then anyone can
decrypt it using your public key P. 

Being able to send secure messages is one
function of public key cryptography.  Another
function is authentication. Suppose you sent a
message M to Bill.  He receives the
message M*.  Bill doesn't know whether M* is
really from you; or, even if it is from you, whether it
has been altered in some way (that is, if the M* he
receives is the same as the M you sent).  The
solution to this problem, using public key
cryptography, is that you also send Bill a digital
signature S along with the message M.  Here is how
this authentication process works.

For simplicity, assume you don't even
encrypt the message to Bill.  You just send him the
plain message M, saying "Dear Bill:  You are wrong
and I am right. Here is why, blah blah blah [for a
few thousand words]."  Then you just sign it by the
following procedure.

First you chop your message down to size,
to produce a (meaningless) condensed version,
where one size fits all.  To do this, you need a
message chopper called a "hash function."  You
apply the hash function H to the message M to
produce a "message digest" or "hash value" H(M)
which is 160 bits long.  You then sign the hash
value H(M) with your own private key R, producing
the signature S =3D R(H(M)).

The receiver of the message, Bill, applies the
same hash function to the received message M* to
obtain its hash value H(M*).  Bill then decrypts
your signature S, using your public key P, to obtain
P(S) =3D P(R(H(M))).  He compares the two.  If 
H(M*) =3D P(R(H(M))), then he knows the message
has not been altered (that is, M* =3D M), and that you
sent the message. That's because the equality will
fail if either (1) the message was signed with some
other private key R', not yours, or if (2) the received
message M* was not the same as the message M
that was sent [33].   

By some accident, of course, it could be that
Bill finds H(M*) =3D P(R(H(M))) even if  the message
has been altered, or it is not from you.  But the odds
of this happening are roughly 1 in 2^160, which is
vanishingly small; and even if this happens for one
message, it is not likely to happen with the next.

The Growth of the Information Superspyway

NSA is the U.S. intelligence agency located
in Ft. Mead, Maryland, which is responsible for
collecting electronic and signals intelligence.
Activities include monitoring the conversations of
foreign leaders, listening in on most international
communications (including financial transactions),
breaking codes, and setting the cryptological
standards for U.S. military and security agencies
[34]. In 1975 at the University of California at
Berkeley, I made a special trip over to the
employment office to see the NSA recruitment
posters.  They were, after all, a novelty.  Hardly
anyone knew the NSA ("No Such Agency") existed,
and the word was just getting around that
mathematicians could compete with physicists for
Defense Department largess.

A couple of years later, Bobby Inman
departed his post as head of Naval Intelligence,
=66rom which vantage point he had leaked Watergate
revelations to Bob Woodward, to become head of
NSA.  Soon thereafter, the NSA began harassing
certain mathematicians in the private sector,
claiming "sole authority to fund research in
cryptography" [35].

In those days such a monopoly was possible.
The computer culture was hierarchically structured
and mind-bogglingly pedantic. Peon programmers
produced a token 20 lines of code per day, which
allowed them plenty of time to attend "efficiency"
meetings. Systems analysts involved themselves in
busy work--creating elaborate flow charts to explain
self-evident routines. Only those who learned to toe
the line were allowed gradual access to better
equipment and more CPU time. NSA, meanwhile,
was one of the top markets for expensive,
sophisticated computer equipment. If you wanted to
be a cryptologist [36], you bit the bullet and bowed
to  NSA and IBM.

The federal encryption standard for
unclassified government computer data and
communications, an encryption algorithm called
Lucifer, had been developed by IBM in the early
70s.  It was later certified by a civilian agency, the
National Bureau of Standards (now NIST), as the
Data Encryption Standard (DES)  in 1976.  Unlike
public key cryptography which uses two keys
(either one of which may be used to encrypt, and the
other to decrypt), DES was a symmetric key system,
using a single key to both encrypt and decrypt. 
Because of the single key, DES could be used for
encryption or authentication, but not both
simultaneously.

Through the American Bankers Association
and ANSI's Financial Institution Wholesale Security
Working Group, DES entered the banking world as
a method of encryption and message authentication
in electronic funds transfer.  But for digital
signatures it made more sense to rely on public key
cryptography. And although the NIST began to
solicit public-key cryptographic algorithms in 1982,
nothing would be approved for another decade, so
both federal agencies and private organizations,
including banks, began to look to commercial
sources of digital signature technology. (They
basically settled on one called the Rivest-Shamir-
Adleman (RSA) system.)

Meanwhile, the anarchy of the personal
computer had been unleashed.  The PC allowed one
person to be in charge of the entire software
development process.  She could be hardware
technician, systems analyst, mathematician,
programmer, artist-in-residence, and general hell-
raiser rolled into one.  Just as Gutenberg inspired
later generations to learn to read precisely because
they had, Pogo-like, acquired the ability to write, so
did the appearance of the microprocessor inspire a
generation of  talented and creative people to absorb
themselves in computer-accentuated tasks which no
longer mandated interaction with a phalanx of
mandarins whose notion of Eros was a COBOL
routine to insert Tab A into Slot B.  To be sure, the
PC was not powerful enough to break codes
(cryptanalysis), but it was a good enough tool for
creating cryptography software.

In 1984 Reagan's National Security Decision
Directive 145 (NSDD-145) shifted the
responsibility for certifying DES-based products to
NSA.  Executive Order 12333 in 1980 had made the
Secretary of Defense the government's executive
agent for communications security, and NSDD-145
expanded this role to telecommunications and
information systems.  The Director of NSA was
made responsible for the implementation of the
Secretary's responsibilites.  In 1986 NSA created an
uproar by saying it would no longer endorse DES
products after 1988, and would substitute a new set
of incompatible, classified, hardware standards. 
Banks and software vendors weren't happy with the
news because they had only recently invested
heavily in DES-based systems. But Congress
effectively  rejected NSDD-145's federal computer
security plan by passing the Computer Security Act
of 1987, and DES was reaffirmed anyway (with the
NIST reinstated as the certifier of applications that
met the standard), and then affirmed again in 1993.  
(The next DES review is scheduled for 1998.)

Changes in technology were creating both
new security concerns and spying opportunities.  On
the one hand, a rank amateur with a scanner could
sit in his apartment and monitor his neighbors'
cordless and cellular telephone conversations. (After
all, if a signal makes it into your bedroom, you may
feel you have a right to tune it in.)  On the other
hand, the NSA could in the same way make use of
the electromagnetic signals sent out by computer
hardware components. Unshielded cables act as
radio broadcast antennas. Related signals, especially
=66rom the computer monitor and the computer's
CPU, are sent back down the AC power cord and
out into the building's electrical wiring. Signals may
also be transmitted directly into the phone line
through a computer modem (which isn't in use).
These frequencies  can be tuned, so that what
appeared on one person's computer screen can be
displayed on an observer's screen a block away. 
(There were no laws against monitoring computer
radiation then, and there are none now, so the NSA
can take the position that it is doing nothing illegal
by parking its monitoring vans in domestic spots in
New York, Chicago, San Francisco, and
Washington, D.C.  [37].)

 The erosion of the spying monopoly lead to
the 1986 Electronic Communications Privacy Act
(ECPA) which prohibited phone and data-line
tapping--except, naturally, by law enforcement
agencies and employers. ECPA made cellular (but
not cordless) phone monitoring illegal. President
Bush would later sign a second law which
prohibited even the *manufacture or import* of
scanners that are capable of cellular monitoring. 
But the latter law was nonsensical, since *every
cellular phone is itself a scanner*. In a
demonstration for a Congressional subcommittee, it
took a technician only three minutes to reprogram a
cellular phone's codes so that it could be used for
eavesdropping [38].

 With the worldwide collapse of
Communism, federal agents quickly discovered a
new fount of terrorist activity: American teenagers,
hackers. The Secret Service crusade to conquer
children started when Congress passed the
Computer Fraud and Abuse Act in 1986, and
culminated in May 1990 with Operation Sundevil,
in which 42 computer systems were seized around
the country, along with 23,000 floppy disks.

One college-age hacker, Chris Goggans
(a.k.a. Eric Bloodaxe) upon receiving information
which lead him to suspect the coming raid, went
home and (like any good host) cleaned and
vacuumed his apartment, placed little notes in
drawers ("Nope, nothing in here";  "Wrong, try
again"), and adorned his desk with brochures from
the local Federal Building--titles like How to
Become an FBI Agent, . . . Secret Service Agent, etc. 
The raid came one morning while Goggans was in
bed. "Leading the pack is Special Agent Tim
Foley,"  Goggans recounts, "and he's got his service
revolver out, and he's got it pointed at me. He's a
pretty big guy and I'm me. . . . Hackers are a
notoriously violent group of people who are known
for their physical prowess, so  guns are definitely
always necessary" [39 ].

Paranoia verged on the imbecilic. AT&T
Security found a description of 911 system
administration, called "E911," on one bulletin board
service. They claimed in court the theft of this
information was worth exactly $79,449, but the case
fell apart when the defense showed the same
information, with more technical details, about the
911 system was publicly available from AT&T for
the mere price of $13.

The FBI, meanwhile, was undergoing
culture shock. Telephone carrier signals were now
digital and multiplexed, so that any specific channel
might be interleaved among many others in a
continuous stream of bits which the FBI could no
longer access with only a pair of alligator clips. In
March 1992 the FBI proposed Digital Telephony
legislation (code-named in FBI documents
"Operation Root Canal") that would require private
industry to provide access ports in digital equipment
for the purpose of tapping specific conversations.

The FBI proposal didn't sit well with the
General Services Administration (GSA), the largest
purchaser of telecommunications equipment for the
U.S. government.  GSA noted that the "proposed
bill would have to have the FCC or another agency
approve or reject new telephone equipment mainly
on the basis of whether the FBI has the capability to
wiretap it." So GSA opposed the legislation for
security reasons, noting it would "make it easier for
criminals, terrorists, foreign intelligence (spies) and
computer hackers to electronically penetrate the
public network and pry into areas previously not
open to snooping.  This situation of easier access
due to new technology changes could therefore
affect national security"  [40].

Ironically, the World Trade Center was
subsequently bombed by a group that was already
under FBI surveillance, so one could make a case
that *voyeurism*, not public security, was the real
intent of the proposed legislation [41]. The 1992
Digital Telephony proposal would have also given
the Justice Department the unilateral and exclusive
authority to enforce, grant exceptions, or waive
provisions of the law, or enforce it in Federal Court. 
You know, the *Justice Department*: that splendid
collection of righteous lawyers, whose recent
triumphs include overseeing the slaughter of a
religious group in Waco, Texas [42], running a
software company into bankruptcy and
appropriating its software [43], and allegedly
manipulating the machinery of justice to cover
tracks left by financial thieves [44].

Now the Computer Security Act of 1987 had
authorized a U.S. government project to develop
standards for publicly-available cryptography. On
April 16, 1993 the Clinton Administration
announced two new controversial Federal
Information Processing Standards (FIPS) which
embodied Capstone's principal elements.  These
were the Escrowed Encryption Standard (EES)--
a.k.a. "Clipper"--and the Digital Signature Standard
(DSS).  All private companies doing business with
the government might be affected.

The Escrowed Encryption Standard

The EES was promulgated by the Clinton
Administration as a voluntary (for now, anyway)
alternative to the Data Encryption Standard (DES).
It involved a bulk data encryption algorithm called
Skipjack, which would be contained on a tamper-
resistant chip, called the Clipper Chip (or MYK-78).
The chip would be manufactured by VLSI Logic,
and programmed with the algorithms and keys by
Mykotronx at a facility in Torrance, California. 
Each chip would contain a trapdoor that would
allow the government, using a two-part key (U =3D
U1+U2), each half deposited with a different escrow
agency, to decode any communications sent through
the chip [45]. 

Here is how the process works. (You can
skip this paragraph and the next one if you like.) In
addition to the Skipjack encryption algorithm, each
chip will contain a 80-bit family key F that is
common to all chips; a 30-bit serial number N; and
an 80-bit secret "unique" key U which can be used
to unlock all messages sent through the chip. 
Suppose I have my secure device get in touch with
Veronica's secure device.  The first thing that
happens is our two chips agree on a randomly
generated 80-bit symmetric session key K, which
will be used only for this one conversation.  The
Clipper Chip takes our whispered message stream
M and encrypts it with K, using the Skipjack
algorithm, producing the encrypted message K(M).
Simple enough.  But my chip also has other ideas. 
As an entirely separate process, it also takes the
session key K and encrypts it with the secret key U,
producing U(K).  Then it tacks the serial number N
on to the end of the encrypted session key, giving
the sandwich U(K)+N.  Then it takes the family key
F and encrypts the sandwich, giving F[U(K)+N]. 
The encrypted sandwich, F[U(K)+N], is called the
LEAF, or "Law Enforcement Access Field."  Both
my encrypted message K(M) and the LEAF,
F[U(K)+N], are sent out over the telephone line. 
Veronica's chip receives both these, but mostly
ignores the LEAF.  Her chip simply takes the
previously agreed session key K and uses it to
decrypt the encrypted message, yielding K[K(M)] =3D
M.  

Now suppose Fred is a horny FBI agent who
wants to listen in on all this.  He gets a warrant
(maybe), and has the phone company plug him into
the conversation.  With his listening device, he
siphons off both my encrypted message K(M) and
the LEAF, F[U(K)+N].  As a member of the FBI he
is allowed to know the family key F, which he uses
to decrypt the LEAF, yielding the sandwich: 
F{F[U(K)+N]} =3D U(K)+N.  So now he knows the
serial number N.   He then takes N along with his
warrant over to the first escrow agency, which gives
him half of the secret key, U1.  He takes N with his
warrant over to the second escrow agency, which
gives him the other half, U2.  He now knows the
secret key U =3D U1+U2.  He uses U to decrypt the
encrypted session key:  U[U(K)] =3D K.  Now he
knows the session key K, which he uses to decrypt
my encrypted message:  K[K(M)] =3D M.  To his great
disappointment, he discovers I was only calling to
thank Veronica for the pepperoni and cheese pizza
she sent over.

Industry was urged to build the EES into
every type of communication device: computer
modem, telephone, fax, and set-top TV converter. 
Of course to do so (surprise, surprise) will make a
product subject to State Department ITAR export
controls. But AT&T, at least, promptly popped the
Clipper Chip into the AT&T Security Telephone
Device 3600, which has a retail price of about
$1,100, because they had been "suitably
incentivised" (see below).

Another implementation of the ESS is the
Capstone Chip (Mykotronx MYK-80), which
includes Clipper's Skipjack algorithm, and adds to it
digital signature, hash, and key-change functions. 
While Clipper is mostly intended for telephone
communication, Capstone is designed for data
communication.  Finally there is Tessera, which is a
PCMCIA card that contains a Capstone Chip. 
Despite generating universally negative comments,
EES was  approved by the Department of
Commerce as a federal standard in February 1994.

The details of the NSA-developed Skipjack
algorithm are classified.  However, it uses 80-bit
keys and scrambles the data for 32 steps or rounds. 
The earlier standard, DES, uses 56-bit keys and
scrambles the data for only 16 rounds. But the
secrecy of Skipjack removed some of its credibility.
People are confident in the security of DES, because
its details are public.  Hence people have probed
DES over the years and failed to find any
weaknesses.  The primary reason for Skipjack's
classification appears to be an attempt to prevent its
use without transmission of the associated LEAF
field.

An outside panel of expects concluded there
was no significant risk that messages encrypted with
the Skipjack algorithm would be breakable by
exhaustive search in the next 30 to 40 years.  The
same cannot be said for the EES protocol as a
whole.  Matthew Blaze, a researcher at AT&T 
showed there are ways to corrupt the LEAF, so that
the session key K cannot be recovered, and hence
messages cannot be decrypted [46].  Of course if
you are sending data files, and not voice, you can
ignore the presence or absence of the Clipper Chip
altogether.  Just encrypt your file with, say, Pretty
Good Privacy, before you send it through the
Clipper Chip.  Thus your original message is an
already-encrypted file, and it won't matter if  FBI 
Fred reads it or not.  But things are not so simple
with voice messages.  So the first target for a
government ban is alternative encryption devices
for voice communication, particularly if the Clipper
Chip doesn't catch on.  Which would be nothing
new:  for years ham radio operators have been
prohibited from using encryption on the air.

The future of the EES may depend on the
coercive purchasing power of the U.S. government. 
A memorandum prepared for the Acting Assistant
Secretary of Defense had noted a number of U.S.
computer industries objections to a trapdoor chip,
such as the Clipper Chip:  "The industry argues
persuasively that overseas markets (much less drug
lords or spies) will not look with favor on U.S.
products which have known trapdoors  when
offshore products which do not have them are
available.  In support of their argument, they note
that powerful public-key cryptography developed
and patented by RSA using U.S. tax dollars is free
to developers in Europe, subject to royalties in the
United States, and cannot be exported without
expensive and time-late export licenses.  These
charges are true.  . . .Despite these concerns, the
President has directed that the Attorney General
request that manufacturers of communications
hardware use the trapdoor chip, and at least AT&T
has been reported willing to do so (having been
suitably incentivised by promises of government
purchases)" [47].


The Digital Signature Standard

The second announced standard, DSS, uses
a digital signature algorithm (DSA) to authenticate
the source and validity of messages [48].  Digital
signatures are the equivalent of handwritten
signatures on legal documents.  While there is yet
no body of case law dealing with the subject,
documents signed with proper digital signatures will
almost certainly be legally binding, both for
commercial use as defined in the Uniform
Commercial Code (UCC), and will probably also
have the same legal standard as handwritten
signatures. 

The computer industry had generally wanted
the U.S. government to choose instead the RSA
algorithm, which was currently the most widely
used authentication algorithm. The banking and
financial services industry were using both the RSA
algorithm and a modified form of the DSA
algorithm [49].

As we saw previously, it is typically not the
entire message that is signed, but rather a condensed
form of it, a hash value.  The hash function for the
DSS is the Secure Hash Standard (SHS), which
accepts a variable-size input (the message) and
returns a 160-bit string.  SHS was adopted as a
government standard in 1993 [50]. 

That both EES and DSS were rushed forth in
an attempt to break the spread of good cryptography
in the private sector is acknowledged even by a
government agency, the Office of Technology
Assessment (OTA):  "In OTA's view, both the EES
and the DSS are federal standards that are part of a
long-term control strategy intended to retard the
general availability of 'unbreakable' or 'hard to
break' cryptography within the United States, for
reasons of national security and law enforcement. It
appears that the EES is intended to complement the
DSS in this overall encryption-control strategy, by
discouraging future development and use of
encryption without built-in law enforcement access,
in favor of key-escrow encryption and related
technologies" [51].

Which brings us back to privacy and the
monetary system.

The Buck Stops Here

In 1993 SWIFT began asking users of  its
messaging system to include a purpose of payment
in all messages, as well as payers, payees, and
intermediaries.  This type of arrangement would
allow NSA computers to scan for any names in
which they were interested.  To be sure,
$10,000,000 for the "Purchase of Plutonium" would
have been scanned for anyway.  But now they can
search for "Hakim 'Bobby' Bey," because someone
has decided he's a terrorist.  Or someone decided
they just don't like him, and so they claim he's a
terrorist.

In addition, proposals resurfaced for a two-
tier U.S. currency.  When such a proposal was
rumored around 1970 during the slow breakdown of
the Bretton Woods agreement, the rumor was
dismissed as a paranoid fantasy. Recently the
proposal itself has been discussed on the Federal
Page of the Washington Post, which gives support
to the plan of "an expert on terrorism" (*another
one?*) to have two separate U.S. currencies, "new
greenbacks for domestic use and new 'redbacks' for
overseas use."  The International Counterfeit
Deterrence Strike Force (an inter-agency working
group informally called the "Super-Bill
Committee") supports a revived 1989 DEA plan for
the forced conversion of "domestic" dollars into
"international" dollars by U.S. travelers at the
border, which would be re-exchanged on their
return [52].

While Customs deals with physical cash,
NSA is set to deal with the electronic variety. That
NSA has in some circumstances already monitored
international banking transactions since at least the
early 1980s seems evident from the inclusion of
detailed banking transactions between the
Panamanian branch of the Discount Bank and Trust
of Switzerland and a Cayman Islands bank in a
classified report to the Secretary of State during the
Reagan administration. The information in the
report seemingly could only have come from
electronic access to the bank's computerized
records.  Some observers have speculated that a
bugged computer program, Inslaw's PROMIS, was
involved. This program, allegedly stolen from
Inslaw by the U.S. Department of Justice, was sold
to dozens of banks. (A federal bankruptcy judge
found that the Justice Department had purposefully
propelled Inslaw into bankruptcy in an effort to
steal the PROMIS software through "trickery, deceit
and fraud" [53].)  The program was said to have
been altered in such a way to allow government
agencies trapdoor access into a bank's transaction
records [54].

The Federal Deposit Insurance Corporation
(FDIC) is the government corporation that insures
deposits at U.S. member banks.  The FDIC
Improvement Act of 1991 required the FDIC to
study the costs and feasibility of tracking every
bank deposit in the U.S.  The notion was it was
necessary to compute bank deposit insurance
requirements in real time.  Not everyone thought
this was a good idea.  The American Banker's
Association noted it was inconceivable that such
data would "be used only by the FDIC in deposit
insurance coverage functions." And even though the
FDIC itself argued against the proposal in its draft
report to Congress in June 1993, FinCEN used the
occasion to propose a "Deposit Tracking System"
(DTS) that would also track deposits to, or
withdrawals from, U.S. banks accounts in real time. 

So advances in cryptography come face to
face with round-the-clock, round-the-border
surveillance.

F.A. Hayek argued for the denationalization
of money, an abolition of the government monopoly
over the money supply, and the institution of a
regime of competitive private issuers of currency
[55]. One reason was to stop the recurring bouts of
acute inflation and deflation that have become
accentuated over this century.  Another reason was
to make it increasingly impossible for governments
to restrict the international movement of
individuals, money and capital, and thereby to
safeguard the ability of dissidents to escape
oppression.  He said that "attempts by governments
to control the international movements of currency
and capital" is at present "the most serious threat not
only to a working international economy but also to
personal freedom; and it will remain a threat so long
as governments have the physical power to enforce
such controls." 

Two decades ago, Hayek's proposal seemed
to have scant probability of ever coming about.   No
longer. 

Hayek's dream is about to be realized.

PART  II:  DIGITAL CASH

[To Be Continued]

Footnotes

[1]   The Principia Discordia, or How I Found
Goddess and What I Did to Her When I Found Her
was authored by Malaclypse the Younger (a
computer programmer named Greg Hill) and 
recounts the visionary encounter he and Omar
Ravenhurst (Kerry Thornley) had with Eris, the
Goddess of Chaos, in an all-night bowling alley. 
Kerry Thornley is also the author of Zenarchy as
well as a novel about Lee Harvey Oswald, whom
Kerry knew in the Marines.  Some of the early
Erisian (Discordian) writings were mimeographed
at the office of Jim Garrison, the New Orleans
District Attorney, where a friend of Kerry's worked. 
Principia Discordia may be found on the Internet at
the wiretap.spies.com gopher, in the directory
Electronic Books, filed under Malaclypse the
Younger.  It and the other works mentioned in this
footnote are also available from Loompanics
Unlimited, P.O. Box 1197, Port Townsend, WA
98368. Phone: 206-385-2230, Fax: 206-385-7785.

[2]  The NSA employee handbook notes:
"It is the policy of the National
Security Agency to prevent and
eliminate the improper use of drugs
by Agency employees and other
personnel associated with the
Agency.  The term "drugs" includes
all controlled drugs or substances
identified and listed in the Controlled
Substances Act of 1970, as amended,
which includes but is not limited to:
narcotics, depressants, stimulants,
cocaine, hallucinogens and cannabis
(marijuana, hashish, and hashish oil).
The use of illegal drugs or the abuse
of prescription drugs by persons
employed by, assigned or detailed to
the Agency may adversely affect the
national security; may have a serious
damaging effect on the safety [of
yourself] and the safety of others;
and may lead to criminal
prosecution.  Such use of drugs
either within or outside Agency
controlled facilities is prohibited."
A copy of this handbook may be found in the
hacker publication Phrack Magazine, No. 45, March
30, 1994, which is available on the Internet at 
ftp.fc.net/pub/phrack. 

[3]  Governments have always been in the drug
business, and perhaps always will be.  In earlier
times, governments attempted a monopoly on drugs,
sex, and religion.  But in recent years the ungodly
have stopped paying tithes, so many governments
have gotten out of the religion business, and private
competition has forced them out of the sex business. 
Of the big three, most governments are left with
only drugs, which explains why drugs are politically
more important than either sex or religion.  Two
references on historical drug politics are Jack
Beeching, The Chinese Opium Wars, Harcourt
Bruce Jovanovich, New York, 1975, and Alfred W.
McCoy, The Politics of Heroin:  CIA Complicity in
the Global Drug Trade, Lawrence Hill Books, New
York, 1991. Two references on more recent U.S.
government involvement include the well-
documented book by Peter Dale Scott and Jonathan
Marshall, Cocaine Politics: Drugs, Armies, and the
CIA in Central America, The University of
California Press, Berkeley, 1991, and the less well
substantiated, but provocative, Compromised: 
Clinton, Bush, and the CIA, by Terry Reed & John
Cummings, Shapolsky Publishers, New York, 1994.

[4] The following may be related, although no
charges have been filed.  In 1987 Tallahassee police
traced an alleged child porn operation back to a
warehouse in Washington, D.C.  The warehouse
was operated by a group called The Finders, whose
leader has an extensive background in intelligence. 
Customs agents had information that was, according
to Customs and FBI documents posted on the
Internet by Wendell Minnick (author of Spies and
Provocateurs: A Worldwide Encyclopedia of
Persons Conducting Espionage and Covert Action,
1946-1991), "specific in describing 'blood rituals'
and sexual orgies involving children, and an as yet
unsolved murder in which the Finders may be
involved."  The evidence included a telex which
"specifically ordered the purchase of two children in
Hong Kong to be arranged through a contact in the
Chinese Embassy there" and a photographic album. 
"The album contained a series of photos of adults
and children dressed in white sheets participating in
a blood ritual.  The ritual centered around the
execution of at least two goats. . . ."  As the
investigation proceeded, the "CIA made one contact
and admitted to owning the Finders organization as
a front for a domestic computer training operation,
but that it had 'gone bad.'  CIA defers all further
contacts to FCIA (Foreign Counter Intelligence
Agency).  FCIA is distinct and autonomous
organization within FBI. . . . FCIA contacts
[Washington] MPD Intelligence and advised that all
reports regarding Finders are to be classified at the
Secret level.  FCIA also advised that no information
was to be turned over to the FBI WFO [Washington
Field Office] for investigation, and that the WFO
would not be advised of the CIA or FCIA
involvement/contact." 

I've since checked with all my programming
friends, but no one remembers seeing a computer
training film involving the sacrifice of goats.

[5]  It is argued that the creation and distribution of
images of  nude children should be prohibited, since
they might be used "for the purpose of sexual
stimulation or gratification of any individual who
may view such depiction" (Edward De Grazia, The
Big Chill: Censorship and the Law, Aperture, Fall
1990, page 50). Where I grew up, children
sometimes played naked.  However, I guess in that
case rays of natural light seen by the human eye
underwent a mysterious *transubstantiation* that
turned the data into *pastoral innocence* before
digitized messages were sent to the brain.  By
contrast, .gif files stored in a computer have not
undergone transubstantiation, and remain slimy
with evil inherited from the Original Snub. 

[6]  The Justice Department's Office of General
Counsel issued a legal opinion on the First
Amendment constitutionality of ITAR restrictions
on public cryptography on May 11, 1978. The
opinion--addressed to Dr. Frank Press,  the Science
Adviser to the President--concluded: "It is our view
that the existing provisions of the ITAR are
Unconstitutional insofar as they establish a prior
restraint on disclosure of cryptographic ideas and
information developed by scientists and
mathematicians in the private sector."  The ITAR
regulations are also referred to as Defense Trade
Regulations.  See Department of State, Defense
Trade Regulations, 22 CFR 120-130, Office of
Defense Trade Controls, May 1992.  The State
Department turns all cryptology decisions over to
NSA.

[7] Stewart A. Baker, "Don't Worry, Be Happy,"
Wired Magazine, June 1994.

[8] Remarks at Computers, Freedom and Privacy
Conference IV, Chicago, March 26, 1994.

[9]  Denning, Dorothy E., "Encryption and Law
Enforcement," Georgetown University,  February
21, 1994.

[10] Which explains, I guess, why I am no longer
able to get any smack with my pepperoni and
cheese.

[11] U.S. Department of State, Bureau of
International Narcotics Matters, International
Narcotics Control Strategy Report, U.S.
Government Printing Office, April 1994.

[12]  Ibid.

[13]  Kimery,  Anthony L.,  "Big Brother Wants to
Look into Your Bank Account (Any Time It
Pleases),"  Wired Magazine,  December 1993.

[14]  Chicago Tribune, January 20, 1995.

[15] Timothy C. May,  "The Crypto Anarchist
Manifesto," September 1992.

[16] Steven B. Duke and Albert C. Gross, America's
Longest War:  Rethinking Our Tragic Crusade
Against Drugs, Putnam, New York, 1993.

[17] Examples may be found in Steven Wisotsky,
Beyond the War on Drugs, Prometheus Books,
Buffalo, New York, 1990.

[18] John Powell and Ellen Hershenov, "Hostage to
the Drug War: The National Purse, The
Constitution, and the Black Community,"
University of California at Davis Law Review, 24,
1991.

[19] David B. Kopel, "Prison Blues:  How
America's Foolish Sentencing Policies Endanger
Public Safety," Policy Analysis No. 208, Cato
Institute, Washington, D.C., May 17, 1994.

[20] Milton Friedman, "Open Letter to Bill Bennet,"
Wall Street Journal, September 7, 1989.

[21] Larry Keller,  "Sheriff's Office Makes Own
Crack for Drug Stings," Fort Lauderdale News &
Sun Sentinel, April 18, 1989.

[22] The quote may be found on page 5 in Andrew
Schneider and Mary Pat Flaherty, Presumed Guilty: 
The Law's Victims in the War on Drugs, reprinted
=66rom The Pittsburgh Press, August 11-16, 1991.

[23]  Melanie S. Tammen, "The Drug War vs. Land
Reform in Peru,"  Policy Analysis No. 156, Cato
Institute, Washington, D.C., July 10, 1991.

[24] Rensselaer W. Lee, The White Labyrinth: 
Cocaine and Political Power, Transaction, New
Brunswick, NJ, 1989.

[25] House of Representatives, Banks Records and
Foreign Transactions concerning P.L. 95-508,
House Report 91-975, October 12, 1970.

[26] U.S. Senate Permanent Subcommittee on
Investigations, Crime and Secrecy: The Use of
Offshore Banks and Companies, U.S. Government
Printing Office, February 1983.

[27]  President's Commission on Organized Crime,
The Cash Connection:  Organized Crime, Financial
Institutions, and Money Laundering, U.S.
Government Printing Office, October 1984.

[28] Bank for International Settlements, Large
Value Funds Transfer Systems in the Group of Ten
Countries, May 1990.

[29]  Ernest T. Patrikis, Thomas C. Baxter Jr., and 
Raj K. Bhala,  Wire Transfers:  A Guide to U.S. and
International Laws Governing Funds Transfer,
Probus Publishing Company, Chicago, IL, 1993.

[30]  The National Information Infrastructure:
Agenda for Action.
[31] David Kahn, The Codebreakers:  The Story of
Secret Writing, Macmillan, New York, 1967.

[32] The best accessible book on the subject is
Bruce Schneier, Applied Cryptography, John Wiley
& Sons, New York, 1994.

[33] It could also fail for other reasons, such as a
signature garbled in transmission (solution: resend
it), or disagreement on the hash function (solution:
adopt a common standard, such as the Secure Hash
Standard, discussed later).

[34]  The activities of the NSA were first
comprehensively surveyed in James Bamford, The
Puzzle Palace: a Report on NSA, America's Most
Secret Agency, Houghton Mifflin   Company,
Boston, 1982.

[35]  David Burnham, The Rise of the Computer
State, Random House, New York, 1983.

[36]  Cryptology is divided into cryptography, the
art of secret writing (encryption), and cryptanalysis,
the art of code breaking.  By analogy, thinking of
the world of banking divided into vault-keepers and
thieves.

[37]  Computer Monitor Radiation (CMR) is
involved in the plot of Winn Schwartau's *Terminal
Compromise*, the best hacker novel available.  A
freeware version, replete with misspellings and
other typos, under the filename termcomp.zip, is
available by ftp or gopher from many sites.  One
location is ucselx.sdsu.edu/pub/doc/etext.

[38]  Cindy Skrzycki, "Dark Side of the Data Age,"
Washington Post, May 3, 1993.

[39] Interviewed by Netta Gilboa in Gray Areas
Magazine.  Interview reprinted in The Journal of
American Underground Computing,  1(7),  January
17, 1995.

[40] Attachment to memo from Wm. R. Loy 5/5/92,
(O/F)-9C1h(2)(a)-File (#4A).

[41] I was a block away in a building with a view of 
one of the World Trade Center towers when the
explosion occurred, but, along with all the Barclays
Precious Metals dealers, only found out about the
bomb when the news came across the Telerate
monitor a few minutes later.

[42]  Not that there weren't good motives for the
operation.  For example, the four BATF agents slain
in the attack on the Branch Davidians were all ex-
bodyguards for the Clinton presidential campaign,
and heaven knows we've already heard *enough*
revelations from Clinton's ex-bodyguards.

[43] INSLAW, discussed further below.

[44]  The latter statement is speculation on my part,
and I have no evidence to back it up.  I am certainly

events, cited by Nicholas A. Guarino ("Money,
Fraud, Drugs, and Sex," January 26, 1995): When
Madison Guaranty Savings and Loan folds, it is
somewhere between $47 and $68 million in the
hole. The tab is settled at $65  million.  One of the
biggest debtors to Madison is a Madison director, 
Seth Ward, who is the father-in-law of Webb
Hubbell. Webb is Hillary Clinton's former law
partner and afterward (until April 1994) Associate
Attorney General (the Number 3 position) at the
Justice Department, who gets assigned to
investigate Whitewater. But when the Resolution
Trust Corporation (RTC) takes over Madison
Guaranty Savings & Loans, Hillary  has been on
retainer to Madison for many   months.  The  RTC
brings suit to obtain $60 million from Madison
Guaranty's debtors. But Hillary negotiates the RTC
down from $60 million to $1 million.  Hillary then
gets the RTC to forgive the $600,000 debt Seth
Ward owes the RTC, leaving the RTC with
$400,000 out of the original $60 million owed.  But
(surprise) Hillary does this as the counsel for the
RTC, not Madison.  Her fee for representing the
RTC?  $400,000, which leaves the RTC with
nothing.

[45] Dorothy E. Denning, "The Clipper Encryption
System,"  American Scientist, 81(4), July/August
1993, 319-323.  The NIST and the Treasury
Department's Automated Systems Division were
designated as the initial escrow agents.

[46] Matt Blaze, "Protocol Failure in the Escrowed
Encryption Standard," AT&T Bell Laboratories,
June 3, 1994.

[47] Ray Pollari, Memorandum for the Acting
Assistant Secretary of Defense (C31), April 30,
1993.

[48] National Institute of Standards and Technology
(NIST), The Digital Signature Standard, Proposal
and Discussion, Communications of the ACM,
35(7), July 1992, 36-54.

[49] American National Standards Institute,
American National Standard X9.30-199X: Public
Key Cryptography Using Irreversible  Algorithms
for the Financial Services Industry: Part 1: The
Digital  Signature Algorithm (DSA), American
Bankers Association, Washington, D.C., March 4,
1993.

[50] National Institute of Standards and Technology
(NIST),  Secure Hash Standard (SHS),  FIPS
Publication 180, May 11, 1993.

[51] Office of Technology Assessment (OTA),
Information Security and Privacy in Network
Environments, September 9, 1994.

[52]  "TerrorDollars:  Counterfeiters, Cartels and
Other Emerging Threats to America's Currency," 
Washington Post,  March 6, 1994.

[53] Maggie Mahar, "Beneath Contempt Did the
Justice Dept. Deliberately Bankrupt INSLAW?,"
Barron's National Business and Financial Weekly,
March 21, 1988; and "Rogue Justice:  Who and
What Were Behind the Vendetta Against
INSLAW?,"  Barron's National Business and
Financial Weekly, April 4, 1988;  U.S. Congress,
Committee on the Judiciary,  The Inslaw Affair,
House Report 102-857, September 10, 1992.

[54] Thompson's, Congress backs claims that spy
agencies bugged bank software, Thompson's
International Banking  Regulator, Jan. 17, 1994.

[55] Hayek, Friedrich A. von, Denationalisation of
Money:  An Analysis of  the Theory and Practice of
Concurrent Currencies, The Institute of Economic
Affairs, Lancing, 1976.


1995 J. Orlin Grabbe, 1280 Terminal Way #3, Reno, NV
89502.  Internet address: kalliste@delphi.com  



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